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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2018
OR
For the transition period from to
Commission File Number: 001-37493
Ooma, Inc.
(Exact name of registrant as specified in charter)
Delaware
(State or other jurisdiction of incorporation or organization)
06-1713274
(I.R.S. Employer Identification No.)
525 Almanor Avenue, Suite 200, Sunnyvale, California 94085
(Address of principal executive offices and zip code)
Registrant’s telephone number ( 650) 566-6600
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.0001
( Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
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 ☐ N O ☒
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. x
Indicate
by
check
mark
whether
the
Registrant
is
a
large
accelerated
filer,
an
accelerated
filer,
a
non-accelerated
filer,
or
a
smaller
reporting
company
or
emerging
growth
company.
See
the
definitions
of
“large
accelerated
filer,”
“accelerated
filer”,
“smaller
reporting
company”
and
“emerging
growth
company”
in
Rule
12b-2
of
the
Exchange
Act
:
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a small reporting company)
Accelerated filer
Small reporting company
☒
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of July 31, 2017 was approximately $140 million based upon
the closing price reported for such date on the New York Stock Exchange.
19.4 million shares
of
common
stock
were
issued
and
outstanding
as
of
March
23,
2018.
Emerging growth company
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.
Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. Except with
respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this 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.
Exhibits
Signatures
Page
2
11
36
36
36
36
37
39
40
54
55
78
78
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79
79
79
79
79
80
81
83
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (“Form 10-K”) contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
The words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,”
“could,” “potentially” and variations of such words and similar expressions are intended to identify such forward-looking statements, which may
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, anticipate demand for our products, and 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 emergency calling, 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, manage our international expansion, and identify, evaluate and consummate acquisitions;
the future trading prices of our common stock; and
other risk factors included under the section titled “Risk Factors”
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You should not rely upon forward-looking statements as predictions of future events. Such statements are based on management’s expectations as
of the date of this filing and involve many risks and uncertainties that could cause our actual results, events or circumstances to differ materially from
those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and
particularly in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to
carefully review and consider all of the information in this Form 10-K and in other documents we file from time to time with the Securities and
Exchange Commission (“SEC”). We undertake no obligation to update any forward-looking statements made in this Form 10-K to reflect events or
circumstances after the date of this filing or to reflect new information or the occurrence of unanticipated events, except as required by law. 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.
When we use the terms “Ooma,” the “Company,” “we,” “us” or “our” in this report, we are referring to Ooma, Inc. and its consolidated subsidiaries
unless the context requires otherwise. Ooma, Butterfleye, 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.
Ooma Inc. | FY2018 Form 10-K | 1
ITEM 1. Business
Overview
PART I
Ooma creates powerful connected experiences for businesses and consumers. Our smart SaaS platform serves as a communications hub,
which offers cloud-based telephony, home security and other connected services. Our business and residential communications solutions deliver our
proprietary PureVoice high-definition voice quality, advanced features and integration with mobile devices, at competitive pricing and value. Our
platform helps create smart workplaces and homes by providing communications, monitoring, security, automation, productivity and networking
infrastructure applications.
We drive the adoption of our platform by providing communications solutions to the large and growing markets for business, residential and
mobile users, and then accelerate growth by offering new and innovative connected services to our user base. Our 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. 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 offer our solutions in the U.S. and Canadian markets and recently began expanding our operations outside of North America. 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 believe 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 stream.
We have experienced significant revenue and user growth in recent periods, growing our Ooma Office and Ooma Telo core users from
approximately 746,000 as of January 31, 2016 to approximately 929,000 as of January 31, 2018, representing growth of approximately 25%. 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 9% for the
year ended January 31, 2018. Our total revenue was $114.5 million, $104.5 million and $88.8 million in fiscal 2018, 2017 and 2016, respectively.
Subscription and services revenue, which primarily includes the recurring portion of our total revenue, has increased as a percentage of our total
revenue over the last three years, from approximately 82% in fiscal 2016 to 89% in fiscal 2018. We have continued to make significant investments
in research and development, brand marketing, and channel development, incurring net losses of ($13.1) million, ($12.9) million and ($14.1) million
in fiscal 2018, 2017 and 2016, respectively. Our Adjusted EBITDA was ($0.2) million, ($1.4) million and ($6.5) million in fiscal 2018, 2017 and 2016,
respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for additional information,
including non-GAAP reconciliations.
We were incorporated in 2003 as a Delaware corporation and our stock is listed on the New York Stock Exchange under the symbol “OOMA.”
Our corporate headquarters is located in Sunnyvale, California.
Ooma Inc. | FY2018 Form 10-K | 2
Our Products and Services
Business Communications
Ooma Office is a fully-featured multi-user communications system for small businesses of any size, 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 (base unit) and an Ooma Linx end-point device, which wirelessly connects regular desktop
telephones and fax machines to the user’s high-speed internet connection. T he 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 .
We also refer to Ooma Office as our Small Business Solution and we may refer to them interchangeably.
The Ooma Office Mobile HD app allows users to make, receive and transfer phone calls, listen to voicemails and manage their Ooma account
on the go with any iOS or Android de vice.
Ooma Office
Mobile HD app
Ooma Office
and Linx for Analog Phones and Fax Machines
We continue to invest in Ooma Office to complete a set of additional features, including support for businesses with more than one location. In
March 2018, we acquired Voxter Communications, Inc., a provider of Unified Communications-as-a-Service (“UCaaS”) solutions for mid-market and
enterprise businesses, which is expected to complement our Ooma Office solution and allow us to meet the needs of organizations of all sizes.
Residential Communications
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 for a one-time fee or to select a new number at no cost. 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. Based on a typical monthly phone bill of $40 for standard
landline service, we estimate that users can save approximately $1,200 in three years by using an Ooma Telo.
The Ooma Premier Service is a suite of over 25 advanced calling features that have been designed to enhance the capabilities of Ooma Telo
on a monthly or annual subscription basis. Ooma Premier helps our users enhance their privacy, personalize their home phone, stay connected on
the go, better manage and access their voicemail, expand calling options, and connect with a variety of devices and services to enable new
functionality and automation. We also offer other premium subscription services to our customers, independent of Ooma Premier, including an
international calling plan and voicemail transcription service.
The Ooma Mobile HD app allows 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 app includes unlimited outbound calls within the U.S., subject to normal residential usage
limitations, and enables users to make international calls on their mobile devices using Ooma’s attractive international calling plan.
Ooma Inc. | FY2018 Form 10-K | 3
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 pro ducts integ rated through the If-This-Then- That platform
(“IFTTT”) . By combining Ooma’s communications intelligence with these products’ functions, we enable innovative and valuable features .
Ooma Telo supports a line of accessories, or end-point devices, to expand the capabilities of the system to serve the needs of an entire
household:
Ooma
Mobile HD app
Ooma Telo Air
Ooma HD3 Handset
Ooma Telo Air. Connects to the Internet wirelessly using the home’s Wi-Fi network and can be paired with mobile phones to answer
incoming mobile calls from any phone in the home.
Ooma handset. Cordless handset delivering smart features, such as the ability to sync the phone book with online contacts and display
picture caller ID by syncing with social media. One-touch voicemail access lets users check messages anywhere in the home and the intercom
button allows them to talk between handsets or transfer calls.
Wireless + bluetooth adapter. Allows users to install the Ooma Telo device anywhere in the home within range of their wireless network.
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.
Safety phone. 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.
Home Security
Ooma Home is a comprehensive do-it-yourself home security solution that connects to Ooma Telo and provides safety for homeowners when
at home or away. The system includes motion, water, door and window, and garage door sensors in addition to the unique ability to remotely place a
local 911 call from the home. Ooma Home also now includes geofencing capabilities to automatically arm and disarm the security system, and in the
near-term we hope to add a new siren and a smoke detector. The Ooma home security app is the interface through which users can interact with
Ooma Home to pair sensors, toggle between home, away and vacation modes, and manage and receive notifications.
As part of developing our comprehensive home security solution, we acquired Butterfleye, Inc. in December 2017, a smart video camera with
artificial intelligence for facial and audio recognition.
Ooma Inc. | FY2018 Form 10-K | 4
Talkatone
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.
Segment Information
We operate in one industry segment, generating revenue from two sources: (1) subscription and services revenue, which are generated from
sales of subscription plans for communications solutions and other connected services; and (2) product and other revenue, generated primarily 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.
Operating segments are defined as components of an entity for which separate financial information is evaluated regularly by the chief
operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance. Our
subscription plans, services and product offerings operate on a single SaaS platform and our chief operating decision-maker evaluates our financial
information and resources and assesses the performance of these resources on a consolidated basis. Accordingly, we have determined that we
have a single reportable segment and operating segment structure.
Sales and Marketing
Our sales and marketing objective is to grow our customer base, and sell to our existing customers additional 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.
Our sales and marketing expenses were $37.3 million, $33.8 million and $28.5 million in fiscal 2018, 2017 and 2016, respectively.
Marketing and Advertising
Traditional . We use television and radio advertising to build awareness and interest for our products and services, which benefits the Ooma
Telo, Ooma Office and Ooma Home 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 ads are directed to our web site, our inbound sales personnel, and/or 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.
Online . We use online marketing including search engine marketing, search engine optimization, online video, digital display advertising and
social media to attract customers as they do online research for the products and services we offer. We continue to reach out to our prospect leads
over time using e-mail and telemarketing until they purchase or the lead is retired.
Word-of-mouth . We actively mobilize our customers and advocates to spread word-of-mouth marketing by sharing Ooma news and
information through social media and e-mail. 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.
Sales, Customers and Backlog
Our small business and residential products are sold through direct channels, retail and resellers. The direct channel and resellers are our
primary distribution channel for small business and the retail channel is our primary distribution channel for residential 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.
Our retail distribution includes national and regional consumer electronics, big box retailers and leading online retailers, including Amazon, Best
Buy, Costco, Walmart and others. No single customer accounted for 10% or more of our total revenue for fiscal 2018, 2017 and 2016.
Ooma Inc. | FY2018 Form 10-K | 5
We generally sign monthly and annual contracts for our subscriptions and invoice our customers on a monthly basis for the services purchased.
Products are generally shipped and billed shortly after receipt of an order. We do not believe that our product ba cklog 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 without
penalty prior to shipment. The majority of our product revenue comes from order s that are shipped and received in the same quarter.
Customer Support
Our primary customer support objective is to satisfy our customers and educate them on the features and benefits of our products to optimize
the overall user experience. 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 as well as billing and payment activities.
We maintain two customer contact centers, one operated by us in Newark, California, which primarily supports our Ooma Office customers, and
the other operated by a third-party provider in Manila, Philippines, which primarily supports our residential customers. We utilize a variety of
communication media to serve the needs of our customers including telephone, online chat, online tutorials and e-mail.
Engineering, Research and Development
We take an integrated approach to the development of our technology. O ur 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.
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. Because our team develops and manages all
aspects of our solutions, we are able to offer an integrated solution that works seamlessly between software and hardware and respond to customer
feedback to add in additional features and services that work across the entire platform. Our team consists of a core set of engineers located
primarily in the San Francisco Bay Area, augmented by development teams in a number of international locations.
Our research and development expenses were $29.3 million, $24.2 million and $18.5 million in fiscal 2018, 2017 and 2016, respectively.
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.
The integrated approach to our technology allows us to operate at a reduced cost and provides competitive advantages:
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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 number of call termination providers based on
cost and call quality. Likewise, our platform allows us to shift our customer base among 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.
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Ooma Inc. | FY2018 Form 10-K | 6
Cloud Infrastructure
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.
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.
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. In fiscal 2018, we
integrated our PureVoice HD technology into the Ooma Mobile HD app. We plan to continue enhancing our mobile apps to incorporate features
related to our partners’ services and other connected services.
Operations and Manufacturing
We deliver our services through two separate data centers located in Northern California and Virginia, both hosted in third-party leased facilities.
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.
We contract with manufacturers in Taiwan and China to produce our on-premise 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 based 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.
Ooma Inc. | FY2018 Form 10-K | 7
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:
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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:
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Established c ommunications 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 and hosted solutions;
Other communications companies such as 8x8 Inc., magicJack VocalTec Ltd., RingCentral, Inc. and Vonage Holdings Corp.;
Traditional on-premise, hardware business communications providers such as Avaya Inc., Cisco Systems, Inc. and Mitel, Inc., any of
which may now or in the future also host their solutions through the cloud, and their resellers;
Companies such as Microsoft Corporation and Broadsoft, Inc. (as recently acquired by Cisco Systems, Inc.);
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.
We also face competition in the home security market from (i) established providers such as SimpliSafe and ADT, as well as from (ii) new
home security offerings such as Nest Secure and Ring Protect.
Competition with Established Telephone and Cable Companies
Established telephone companies such as AT&T, Verizon and CenturyLink, and national cable companies such as Comcast, 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.
Intellectual Property
We rely on a combination of patents, trade secrets, copyrights, trademarks, confidentiality and proprietary rights agreements with our
employees, consultants and other third parties, as well as other contractual protections to establish and protect our intellectual property rights. We
control access to our software, documentation and other proprietary information, and our software is protected by U.S. and international copyright
laws.
Ooma Inc. | FY2018 Form 10-K | 8
As of January 31 , 201 8 , we had 17 issued p atents and 15 patent applications pending in the U.S., and 6 patent applications pending in
foreign jurisdictions, all of which are associated with U.S. applications. Our issued patents will expire approximately between 2028 and 2 03 5 . 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 inva lidated, 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. Despite the foregoing protections , 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 intellect ual property rights is expensive and
uncertain.
Although our success depends, in part, on our ability to protect our proprietary technology and other 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.
Employees
As of January 31, 2018, we had 243 full-time employees, nearly all of whom were located in the U.S. 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.
Regulatory Matters
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 (“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 a number of FCC regulations. Among others, these regulatory obligations
include: contributing to the Federal Universal Service Fund (“USF”), the Telecommunications Relay Service Fund and federal programs related to
phone number administration; providing access to E-911 services; protecting customer information; and porting phone numbers upon a valid
customer request. 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.
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. Although no states
currently require certification for nomadic internet voice communications service providers, a number of states have imposed certain traditional
telecommunications requirements on such services. For example, a number of states require us to contribute to state USF and E-911 and pay other
surcharges, which are passed through to our customers, while others are actively considering extending their public policy programs to include the
services we provide. We expect that state public utility commissions will continue their attempts to apply state telecommunications regulations to
internet voice communications services like ours.
Ooma Inc. | FY2018 Form 10-K | 9
Internationa l 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 Canadian Radio-television and Telecommunications Commission (“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 “Risks Related to Federal, State and International Regulation” in Item 1A. Risk Factors below for more information.
Available Information
Our headquarters are located at 525 Almanor Avenue Suite 200, Sunnyvale, California 94085, and our telephone number is (650) 566-6600.
Our corporate website address is www.ooma.com. We use the Investor Relations page of our website as a routine channel for distribution of
important information, including news releases, analyst presentations, financial information and corporate governance practices. Our filings with the
SEC are posted on our website and available free of charge as soon as reasonably practical after they are electronically filed with, or furnished to,
the SEC. The SEC’s website, www.sec.gov , contains reports, proxy statements and other information regarding issuers that file electronically with
the SEC. The content on any website referred to in this Form 10-K is not incorporated by reference in this Form 10-K unless expressly noted.
Ooma Inc. | FY2018 Form 10-K | 10
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, 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
services, could materially and adversely affect our financial performance.
Our customers generally do not have long-term contracts with us and 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 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. Our Ooma Office customers may choose to
reduce the number of lines or remove some of the solutions to which they subscribe. Ooma Office customers generally pay more for their
subscriptions than residential 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, our
ability to otherwise meet their needs and expectations, and/or other factors beyond our control. As a result, we may have to acquire new customers
or new users within our existing customer base on an ongoing basis simply to maintain our existing level of revenue. If a significant number of
customers terminate, reduce or fail to renew their subscriptions, we may need to incur significantly higher marketing expenditures than anticipated to
maintain or increase our revenue, which could harm our business and results of operations.
Ooma Inc. | FY2018 Form 10-K | 11
O ur business is suscepti ble to a broad array of market forces, and any of our efforts to mitigate risk of customer churn due to one factor may
divert management’s time and focus away from efforts to address customer churn due to other factors. This broad-based susceptibility to c hurn
could materially and adversely affect our financial performance.
Our future success also depends in part on our ability to sell additional subscriptions and functionalities to our current customer base, which
may require increasingly sophisticated, 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. Such increased costs could cause us to increase our
subscription rates, which could increase our customer turnover rate. If our efforts to convince customers to add users and, in the future, to purchase
additional functionalities are not successful, our business may suffer.
We face competition in our markets by our competitors and may lack sufficient financial or other resources to compete successfully.
Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could adversely affect
our ability to compete effectively and harm our results of operations.
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. (recently acquired by Cisco Systems, 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., Mitel, 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 and its free calling service, Google Voice, and the Google
Home personal assistant device, for which Google recently launched a free outbound calling service, and Amazon and its Alexa platform and Alexa
free calling service. All of these companies currently or may in the future host their solutions through the cloud. We also face competition in the
home security market from (i) established providers such as SimpliSafe and ADT, as well as from (ii) new home security offerings such as Nest
Secure and Ring Protect (Amazon recently acquired Ring Inc.).
We believe that some of our existing competitors may consolidate or be acquired. For example, Cisco Systems, Inc. completed its acquisition of
BroadSoft, Inc., in February 2018 and Mitel, Inc. completed its acquisition of ShoreTel, Inc., in September 2017. 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.
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.
We rely significantly on retailers and reseller partnerships to sell our products; our failure to effectively develop, manage and maintain
these sales channels could materially and adversely affect our revenue and business.
We currently sell Ooma Telo and Ooma Office through a combination of direct sales, leading retailers such as Amazon, Costco.com, Best Buy
and Walmart, and our reseller partnerships and a significant portion of our product sales are made through our retail and reseller partnership
channels. Our future success depends on our ability to effectively maintain, develop and expand our retail channel and reseller partnership sales as
we seek to grow and 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. 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.
Ooma Inc. | FY2018 Form 10-K | 12
In addition, o ur Talkatone appli cation relies significantly on the Apple and Google app stores for distribution. Its future success depends on our
continued ability to distribute Talkatone through the se app stores and increase its visibility therein . If Apple or Google determine that Tal katone is
non-compliant with their app store vendor policies, they may revoke our rights to sell Talkatone through their app store at any time , which could
adversely affect our revenue .
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, 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 and they 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 products 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. We may also decide to switch to or bring on additional contract manufacturers in order to better meet our needs. Switching to or bringing on
a new contract manufacturer and commencing production is expensive and time-consuming and may cause delays in order fulfillment at our existing
contract manufacturers or cause other disruptions. For example, we are in the process of bringing on additional contract manufacturers as a result of
our recent acquisition of Butterfleye. We do not have past experience with these manufacturers and it is possible that we may encounter unexpected
issues as we scale our operations with them.
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.
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 expect that we will continue to rely on third-party service providers for hosting, internet access and other services that are vital to our
service offering for the foreseeable future. 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. 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.
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.
Ooma Inc. | FY2018 Form 10-K | 13
We also contract with one or more 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 a nd 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.
We currently serve our customers from data center hosting facilities located in Northern California and Virginia, where we lease space from
Equinix, Inc. These facilities and the procedures we have implemented to restore services quickly in the event of a service outage, by themselves,
will not prevent future outages. Any damage to, or failure 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. Additionally, 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 transfers 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, and anticipate we will continue to do so
for the foreseeable future.
We outsource certain of our software development and design, quality assurance and operations activities to third-party contractors that have
employees and consultants in a number of international locations. Our dependence on third-party contractors creates numerous 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. 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.
Ooma Inc. | FY2018 Form 10-K | 14
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 and our business will be harmed, and we may be exposed to significant
liability .
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. 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. In addition, a significant service outage may cause a high volume of customer support
inquiries, and our third‑party customer service center may not be able to respond to such inquiries in a timely manner. Industry consolidation among
providers of services to us may impact our ability to obtain these services or increase our costs for these services.
Our limited history operating our business at its current scale makes it difficult to evaluate our current business and future prospects,
which may increase the risk of investing in our stock.
Our business has experienced rapid growth in recent periods. We became a public company following our initial public offering (“IPO”) in July
2015 and our revenues have grown from $88.8 million in fiscal 2016 to $114.5 million in fiscal 2018 and our operating expenses have increased from
$59.6 million in fiscal 2016 to $81.8 million in fiscal 2018. B ecause we have only a limited history operating our business at its current scale, it is
difficult to evaluate our current business and future prospects, including 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.
Ooma Inc. | FY2018 Form 10-K | 15
We may 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 $13.1 million, $12.9 million and $14.1 million
in fiscal 2018, 2017 and 2016, respectively. We have expended significant resources to develop, market, promote, and sell our products and
solutions and we expect to continue investing for future growth. Although we generated positive cash flow from operations in fiscal 2018, we may not
continue to do so in the future as a result of our increased expenditures, and we will have to generate and sustain increased revenue to sustain
positive cash flows and achieve future 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 possible
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 opportunities. 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 our 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 rates of growth may decline in the future.
Our user growth and revenue growth rates may decline over time as the size of our active user base increases, and it is possible that the size of
our active user base may fluctuate or decline in one or more markets, particularly as we achieve greater market penetration. Our revenue growth
rate may generally decline over time as our revenue increases to higher levels. As our growth rates decline, investors' perceptions of our business
may be adversely affected and the trading price of our common stock could decline.
We may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our
brand, financial performance and increase the risk of investing in our stock.
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, and if the current and future members of our management team do not effectively scale with this growth , our business,
results of operations and financial condition could be materially and adversely affected.
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 and the customer bases of our competitors will increase our dependence on needing sufficiently large quantities of DIDs.
Ooma Inc. | FY2018 Form 10-K | 16
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 services. During the number transfer process, our new customers must maintain both our service and their existing
phone service. We depend on third-party carriers to transfer phone 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 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.
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, and our ability to detect any such events. In the past, we may have been subject to
undetected distributed denial-of-service, or DDOS cyberattacks, or other forms of attacks by hackers intent on bringing down our services or
accessing confidential information, and we may be subject to DDOS and other forms of attacks 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 detect or 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, or their mobile phone, 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 our connected home
security sensors and our partner’s connected devices, such as Nest’s devices, 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.
Ooma Inc. | FY2018 Form 10-K | 17
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, co nsultants 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 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 transmission of confidential customer inform ation, 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 cryptograp hy 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.
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 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.
Ooma Inc. | FY2018 Form 10-K | 18
The success of o ur business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband
services may block or degrade 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, market and sell products and
services to our current and potential customers that directly compete with our own offerings, which can potentially give such providers a competitive
advantage. Broadband providers also 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. In the past, actions like these taken by U.S. providers would violate
the net neutrality rules adopted by the FCC and described below, however the FCC recently reversed the net neutrality rules, and most foreign
countries have not adopted formal net neutrality or open internet rules, creating an increased risk broadband providers will engage in such anti-
competitive measures against the Company in the United States and elsewhere.
In 2015, the FCC reclassified broadband internet access services as a “telecommunications service” subject to new open internet regulations
and certain common carrier regulations, including the obligation to provide service on just and reasonable terms, requirements related to customer
privacy and requirements for accessibility for people with disabilities. These regulations also prohibited blocking or discriminating against lawful
services and applications and prohibited “paid prioritization,” or providing faster speeds or other benefits in return for compensation.
In December 2017, the FCC largely reversed the existing net neutrality rules, including the classification of broadband Internet service as a
telecommunications service subject to certain common carrier regulations. The FCC’s order is the subject of pending appeals by several parties. The
FCC’s order 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:
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our ability to retain existing customers and attract new customers, sell premium solutions to our existing customers and introduce new
solutions;
the actions of our competitors, including pricing changes or the introduction of new solutions;
our ability to effectively manage our growth and successfully penetrate the communications and connected services markets for small
businesses, residential 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;
the timing of revenue recognition for product sales made through our channel partners under the new ASC 606 revenue recognition
standard, which requires us to recognize revenue upon the sale to our channel partners on a sell-in basis and make estimates for
expected product returns, customer credits and other sales incentives at the time product is shipped. Such estimates for sales reserves
require significant judgment and actual results may differ materially from amounts reported. As a result, this new standard may heighten
the impact of any fluctuations in the timing and magnitude of product returns or customer credits from these channels on our quarterly
operating results;
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.
Ooma Inc. | FY2018 Form 10-K | 19
Any one of the factor s 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 inter nal 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 t rends. 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 not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
We intend to continue making expenditures and investments to support the growth of our business. In the future, we may require additional
capital to pursue our business objectives and to 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 decide 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.
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. To compete successfully
in these emerging markets, we must anticipate and adapt to unpredictable 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 71% of our revenue from Ooma Telo for fiscal 2018 and expect it 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 or announcement of new services and technologies by our competitors could make our solutions obsolete, cause customers to
defer purchases of our services, or otherwise adversely affect our business and results of operations. We may experience difficulties with software
development, operations, design or marketing that could delay or prevent the 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 remain competitive. We do not know whether these investments
will be successful. 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 adequate market acceptance, we may not be able to realize a return on our
investments and our business, financial condition and results of operations may be materially and adversely affected.
Ooma Inc. | FY2018 Form 10-K | 20
Our success depends , in part, on increased public acceptance of our connected services and applications.
Our future growth depends on our ability to significantly increase revenue generated from our communications solutions, our Ooma Home
security service, and other connected services. The markets for cloud-based communications, home security services and connected services are
evolving rapidly and are characterized by an increasing number of market entrants. If these markets 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.
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 overall 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 services. 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 communications
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 unreliable 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 substantial 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 affected.
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 Ooma Home security service faces significant competition in a market segment where the Ooma brand is relatively unknown, and where
there are several established large providers, such as ADT and SimpliSafe, as well as new market entrants with significantly greater resources than
ours, such as Google and its Nest Secure home security system and service. If we fail to create sufficient recognition of the Ooma brand in the home
security market, fail to provide features or benefits in our home security service seen as desirable by consumers, or fail to convince consumers of the
relative benefits of our home security service when compared to those of our competitors, our service could fail to achieve market acceptance and
therefore not generate significant increases to our revenue.
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 Note 11: Commitments
and
Contingencies
in the accompanying notes to
our consolidated financial statements. 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.
Ooma Inc. | FY2018 Form 10-K | 21
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 pat ented 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 lice nse 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:
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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;
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. See Item 1. Business above for additional
information. We cannot predict whether our 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. 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.
Ooma Inc. | FY2018 Form 10-K | 22
Despite our efforts to implement our intellec tual property strategy, we may not be able to protect or enforce our proprietary rights in the U.S. or
internationally (where effective intellectual 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 assurance
and development activit ies to third-party contractors in a number of international locations . We have also entered in to an agreement containing a
confidentiality provision with a third-party contractor located in the Philippines, where we have outsourced a significant portion of our customer
support function. Such a greements may not 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.
If we experience excessive fraudulent activity or cannot meet evolving credit card association 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.
Ooma Inc. | FY2018 Form 10-K | 23
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.
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. 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.
Ooma Inc. | FY2018 Form 10-K | 24
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 may
not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete
acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed
negatively by users or investors. If we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, the
revenue and operating results of the combined company could be adversely affected. Acquisitions may disrupt our ongoing operations, divert
management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business,
financial condition, operating results and cash flows. We may not successfully evaluate or utilize the acquired technology and accurately forecast the
financial impact of an acquisition transaction, including accounting charges.
We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition
or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If we incur debt it
would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to manage our
operations. In addition, our future operating results may be impacted by performance earnouts or contingent payments. Furthermore, acquisitions
may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based
compensation expense and the recording and subsequent amortization or impairments of amounts related to certain purchased intangible assets,
any of which could negatively impact our future results of operations.
When we enter into mergers or other strategic transactions in which we acquire other companies, for example, our acquisitions of Voxter
Communications in March 2018 and Butterfleye in December 2017, 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 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 recently expanded our operations outside
North America as we ramp up to provide services in a number of countries internationally. For example, Voxter Communications operates in
Canada, and its customers have operations in Canada and several other countries outside of the U.S. 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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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;
Ooma Inc. | FY2018 Form 10-K | 25
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reliance on third p arties 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;
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 shortages of inventory, 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 several months 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 an excess or shortage of 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.
Ooma Inc. | FY2018 Form 10-K | 26
Catastrophic events or political instability could disrupt and cause harm to our business.
Our corporate headquarters, offices and one of our data center facilities are located in Northern California, a region that frequently experiences
earthquakes . In addition, our third-party contract manufacturer facilities in China and our sole third-party customer service and support facility in the
Philippines are located on the Pacific Rim near known earthquake fault zones that are vulnerable to damage from earthquakes, tsunamis and/or
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.
As we expand our operations outside the U.S. and Canada, certain changes to U.S. tax laws, including limitations on the 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 operations.
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, 2018, we had federal and state net operating loss carryforwards, or NOLs, of $83.0 million and $62.0 million, respectively,
available to offset future taxable income, which will begin to expire in 2030 if not utilized. We also have federal and research and development tax
credit carryforwards that will begin to expire in 2030 and California research and development tax credit carryforwards with no expiration date.
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. 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.
Ooma Inc. | FY2018 Form 10-K | 27
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, law enforcement access, porting of numbers, revenue reporting, Federal
Universal Service Fund contributions and other regulatory assessments, E‑911, and other matters. If we do not comply with FCC rules and
regulations, we could be subject to FCC enforcement actions, substantial 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.
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 subject to regulation in Canada by the CRTC, subject
to Canadian federal privacy laws and provincial consumer protection legislation. Our international operations are potentially subject to country-
specific governmental regulation and related actions that may increase our costs and 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 adoption of additional 911 requirements by the FCC 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.
Ooma Inc. | FY2018 Form 10-K | 28
If we cannot comply with the FCC’s rules imposing call signaling requirements on VoIP providers lik e us, we may be subject to fines,
cease and desist orders, or other penalties.
The FCC’s rules regarding the system of compensation for various types of traffic 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.
In November 2013, the FCC adopted rules that impose recording, retention, and reporting requirements on VoIP providers like us. These rules
support the Commission’s ability to monitor and redress rural call completion problems, as well as their 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. 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. On July 14, 2017, the FCC released a Second Further Notice of Proposed Rulemaking to consider alternatives to the existing rural call
completion requirements, but has not yet taken action on that Notice.
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. 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.
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, including the manner in
which companies, like us, contribute to the federal USF program, and whether non-interconnected VoIP providers, texting providers and broadband
providers, among others, should contribute to the USF. If the FCC or certain states adopt new contribution mechanisms or otherwise modify
contribution obligations that increase our contribution burden, we will either 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. A number of states require us to contribute funds to state USF
programs, while others are actively considering extending their programs to include the services we provide. We currently pass-through USF
contributions and certain other fees and surcharges to our customers, which may result in our services becoming less competitive as compared to
those provided by others. If our pricing advantage is diminished or eliminated, or if we are required to absorb these increased costs and not pass-
through to our customers, our results of operations would be negatively impacted.
Ooma Inc. | FY2018 Form 10-K | 29
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. 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.
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.
We process, store, and use personal information and other data, which 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 use 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.
For example, in the U.S. and in other jurisdictions, a variety of regulations are currently being proposed that would increase restrictions on
online service providers in the field of data privacy and security, and we believe that the adoption of such increasingly restrictive regulation is likely.
In Canada, penalties for non-compliance with certain Canadian anti-spam legislation that became effective over 2014 and 2015 are considerable,
including administrative monetary penalties of up to $10 million and a private right of action. Within the EU, strict laws already apply in connection
with the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal information, and other customer
data. Data protection regulators within the EU and other jurisdictions have the power to fine non-compliant organizations significant amounts and
seek injunctive relief, including the cessation of certain data processing activities.
The EU’s General Data Protection Regulation, or GDPR, becomes effective in May 2018 and comprehensively regulates the processing of
personal data of any individual residing in the EU. The GDPR provides for significant penalties in the event of violations, including fines of up to 4%
of the violating company’s worldwide revenue. We are taking administrative, contractual and other measures designed to achieve compliance with
the GDPR, but we cannot guarantee these measures will be sufficient or complete when the GDPR goes into effect in May 2018.
Ooma Inc. | FY2018 Form 10-K | 30
Obligations and restrictions imposed by current and future applicable laws, regulations, contracts and industry standards may increase the cost
of our operations, affect our ability to provide all the current features of our s mall business, residential and mobile products and services and our
customers’ ability to use our pr oducts 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. If our third-party contractors or 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.
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.
Ooma Inc. | FY2018 Form 10-K | 31
We ar e 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. 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. 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 the necessary authorizations and licenses 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, government
investigations, reputational harm, fines which may be imposed on us and responsible employees or managers, and, in extreme cases, the
incarceration of responsible employees or managers.
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 import 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, governments, 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 operations. 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
Ooma Inc. | FY2018 Form 10-K | 32
such s tate and local tax authority challenges, audits and related demands, which we are defending against vigorously. A complaint was filed by the
County of Berks, Pennsylvania on January 21, 2016 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.
See Note 11: Commitments
and
Contingencies
of the accompanying notes of our consolidated financial statements.
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.
As a public company, w e are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-
Oxley Act, and the rules and regulations of the applicable listing standards of the New York Stock Exchange. 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 Sarbanes-Oxley Act requires, among other things, that we make a formal assessment and provide an annual management report on the
effectiveness of our 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.
Our control environment may not be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring. A
control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met.
Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and all instances of fraud will be detected. 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.
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 earnings 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. T his guidance, which will include
forward‑looking statements, will be based on projections prepared by our management. 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
Ooma Inc. | FY2018 Form 10-K | 33
business outloo k with analysts and investors. Accordingly, w e 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.
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.
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.
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 comm on stock to decline and could impair our ability to raise capital through the sale of additional equity securities. At January
31, 2018, we had 19.1 million shares of common stock outstanding of which approximately 17.7 million shares were freely tradable. In addition, we
have registered shares of common stock which we may issue under our employee stock plans 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.
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.
Ooma Inc. | FY2018 Form 10-K | 34
Our charter documents and Delaware law could prevent a takeover th at 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.
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.
Our stock price has been and will likely continue to be volatile and could fluctuate or decline, resulting in a substantial loss of your
investment.
Our stock price may fluctuate in response to a number of events and factors, such as quarterly operating results; changes in our financial
projections provided to the public or our failure to meet those projections; our operating and financial performance and prospects and the
performance of other similar companies; the public's reaction to our press releases, other public announcements and filings with the SEC; significant
transactions, or new features, products or services by us or our competitors; changes in financial estimates and recommendations by securities
analysts; failure of securities analysts to cover or track our common stock; media coverage of our business and financial performance; trends in our
industry; any significant change in our management; 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.
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. In addition, the stock market in general, and the market prices for companies in our industry, have experienced volatility that
often has been unrelated to operating performance. These broad market and industry fluctuations may adversely affect the price of our stock,
regardless of our operating performance. In the past, many companies that have experienced volatility in their stock price have become subject to
securities class action litigation. We have been the target of this type of litigation and may continue to be a
Ooma Inc. | FY2018 Form 10-K | 35
target in the future. Securities litigatio n against us could result in substantial costs and divert our management’s attention from other business
concerns, which could harm our business.
If we fail to meet expectations related to future growth, profitability, or other market expectations, our stock price may decline significantly, which
could have a material adverse impact on investor confidence and employee retention.
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, it 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 Note 11: Commitments
and
Contingencies
of the notes of our consolidated financial statements 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.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our corporate headquarters are located in Sunnyvale, California and consists of lease space aggregating approximately 33,400 square feet. We also
lease additional office and warehouse space in the San Francisco Bay Area for various product development, operational and customer support
purposes. Pursuant to co-location agreements, we lease space from third-party data center hosting facilities in Northern California, Texas and
Virginia that support our cloud infrastructure. We believe our existing facilities are adequate to meet our current requirements . 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
For a discussion of legal proceedings, see Note 11: Commitments
and
Contingencies
–
Legal
Proceedings
in the notes to our consolidated financial
statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K, which information is incorporated herein by
reference.
ITEM 4. Mine Safety Disclosures
Not applicable.
Ooma Inc. | FY2018 Form 10-K | 36
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock. Our common stock has been trading on the NYSE under the symbol “OOMA” since July 17, 2015. The
following table sets forth for the periods indicated the high and low intra-day sales prices per share of our common stock, as quoted on the NYSE.
High
Low
PART II
Fiscal Year Ended January 31, 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended January 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
$
$
$
$
$
$
12.75 $
11.00 $
12.30 $
12.30 $
9.90 $
9.92 $
8.67 $
7.30 $
9.00
7.30
7.55
8.85
8.40
8.03
6.22
5.43
Holders of Record . As of January 31, 2018, there were approximately 93 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 not declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our
capital stock.
Ooma Inc. | FY2018 Form 10-K | 37
Stock 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 performanc e graph is not necessarily indicative of future
stock price performance.
Sales of Unregistered Securities. Not applicable.
Use of Proceeds. On July 17, 2015, our registration statement on Form S-1 was declared effective by the SEC for our IPO. There has been no
material change in the planned use of proceeds from our IPO.
Ooma Inc. | FY2018 Form 10-K | 38
ITEM 6. Selected Consolidated Financial Data
The information set forth below for the five years ended January 31, 2018 is not necessarily indicative of results of future operations, and should
be read in conjunction with MD&A and the consolidated financial statements, related notes and other financial information included elsewhere in this
Form 10-K (in thousands, except share and per share data):
Consolidated Statements of Operations Data:
Revenue
Gross profit
Net loss
Basic and diluted net loss per share
Weighted-average common shares outstanding
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments
Working capital (deficit)
Total assets
Debt and capital lease obligations
Deferred revenue, current and non-current
Total liabilities
Total stockholders' equity (deficit)
$
$
$
$
$
2018
114,490 $
68,092 $
(13,121) $
(0.71) $
18,570,128
Fiscal Year Ended January 31,
2016
2015
2017
104,524 $
59,329 $
(12,949) $
(0.74) $
17,490,448
88,775 $
46,910 $
(14,052) $
(1.38) $
10,173,095
72,201 $
35,477 $
(6,410) $
(2.81) $
2,284,241
2014
53,665
22,198
(2,000)
(1.18)
1,688,846
2018
2017
As of January 31,
2016
2015
2014
$
51,790
29,338
73,431
—
15,984
36,363
37,068
53,201 $
34,299
73,338
—
16,030
33,518
39,820
55,404 $
35,891
76,536
632
15,072
33,646
42,890
9,133 $
(5,863)
31,277
11,960
14,383
42,785
(45,145)
6,364
(6,959)
17,716
2,415
10,356
24,034
(39,859)
Ooma Inc. | FY2018 Form 10-K | 39
ITEM 7. M anagement’s Discussion and Analysis of Financial Condition and Results of Operations
The
following
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
our
consolidated
financial
statements
and
the
related
notes
to
those
statements
included
elsewhere
in
this
Form
10-K.
I
n
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
Form
10-K.
The
last
day
of
our
fiscal
year
is
January
31,
and
we
refer
to
our
fiscal
year
ended
January
31,
2018
as
fiscal
2018,
our
fiscal
year
ended
January
31,
2017
as
fiscal
2017,
and
our
fiscal
year
ended
January
31,
2016
as
fiscal
2016.
All
other
references
to
years
are
references
to
calendar
years.
Executive Overview
Ooma creates powerful connected experiences for businesses and consumers. Our smart SaaS platform serves as a communications hub,
which offers cloud-based telephony, home security and other connected services. Our business and residential communications solutions deliver our
proprietary PureVoice high-definition voice quality, advanced features and integration with mobile devices, at competitive pricing and value. Our
platform helps create smart workplaces and homes by providing communications, monitoring, security, automation, productivity and networking
infrastructure applications.
We drive the adoption of our platform by providing communications solutions to the large and growing markets for business, residential and
mobile users, and then accelerate growth by offering new and innovative connected services to our user base. Our 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 our subscription and
services, for which they primarily pay on a recurring monthly basis. We believe we have achieved high levels of customer retention and loyalty by
delivering exceptional quality and customer satisfaction.
We generate subscription and services revenue by selling subscriptions and other services for our communications solutions, as well as other
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 service. We offer our solutions in the U.S. and Canadian
markets and recently began expanding our operations outside of North America.
Beginning in fiscal 2018, we modified our key business metrics to focus on data related to our primary business which is Ooma Telo for
residential customers and Ooma Office for small business customers. Accordingly, our key business metrics below for core users, annualized exit
recurring revenue and net dollar subscription retention rate reflect this change and exclude Business Promoter users and revenue for all periods
presented.
See Item 1. Business above for additional information regarding our business, products and services, competitive market and regulatory
matters.
Fiscal 2018 and Recent Highlights
•
•
•
•
•
•
•
Total revenue was $114.5 million, up 10% year-over-year, reflecting an 8% increase in core users. We have grown our core users 25%
from approximately 746,000 as of January 31, 2016 to approximately 929,000 as of January 31, 2018.
Subscription and services revenue has increased as a percentage of our total revenue over the last three years, from approximately 82%
in fiscal 2016 to 89% in fiscal 2018. We expect subscription and services revenue to continue to increase for the foreseeable future.
Subscription and services revenue from Ooma Office and Ooma Telo grew 59% and 12% year-over-year, respectively.
Total gross margin was 59%, up from 57% in fiscal 2017 and 53% in fiscal 2016, driven by the higher growth of our subscription and
services revenue as compared to product and other revenue.
Net loss was $13.1 million, compared to $12.9 million in fiscal 2017 and $14.1 million in fiscal 2016, reflecting continued investments in
research and development, brand marketing and channel development.
Adjusted EBITDA was ($0.2) million, compared to ($1.4) million in fiscal 2017 and ($6.5) million in fiscal 2016.
Cash provided from operations was $3.2 million, compared to $0.4 million in fiscal 2017 and cash used in operations of ($0.5) million in
fiscal 2016. As of January 31, 2018, we had total cash, cash equivalents and short-term investments of $51.8 million.
Ooma Inc. | FY2018 Form 10-K | 40
We recently completed two business acquisitions as part of bringing unique differentiated solutions to the marketplace.
•
•
In December 2017, we acquired Butterfleye, Inc, a smart video camera and security platform that we plan to sell both standalone and in
combination with our home security solution. The aggregate purchase price included $1.4 million cash paid at closing, as well as certain
deferred cash payments contingent upon the attainment of performance milestones. See Note 12: Acquisitions
and
Divestitures
in the
notes to our consolidated financial statements.
In March 2018, we acquired Voxter Communications, Inc., a provider of UCaaS solutions for mid-market and enterprise businesses. We
believe Voxter will complement our Ooma Office solution and allow us to meet the needs of organizations of all sizes. The aggregate
purchase price included approximately $3.6 million in combined cash and common stock consideration, as well as certain deferred
earnout payments contingent upon the achievement of certain business milestones . See Note 15: Subsequent
Events
in the notes to our
consolidated financial statements.
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 Office customers than Ooma Telo 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 our
small business products increase relative to sales of residential products.
Growth in additional services. We believe that there is significant opportunity for us to increase the additional subscription and services that
our customers purchase from us in both the business and residential markets. Customers who purchase additional subscription and services from us
generate more value to Ooma over the life of our customer relationship. In order to drive adoption of additional services, we will need to continue to
enhance our existing solutions and develop new connected services. For example, we are investing to develop our comprehensive home security
solution and continue to invest in Ooma Office to launch a handful of additional features, including support for businesses with more than one
location.
Investing in long-term revenue growth. We believe that our total addressable market opportunity is large and we intend to continue investing
in sales and marketing to grow our user base. However, we expect the markets in which we conduct our business will remain highly competitive. We
recently entered the home security market and face significant competition from incumbent providers promoting their own home security related
offerings. We also expect to continue investing in research and development to enhance our platform and develop additional connected services. As
described above, we recently completed two business acquisitions, and we may evaluate additional possible acquisitions of businesses, products
and technologies that are complementary to our business .
In addition, we are adopting ASC 606, Revenue
from
Contracts
with
Customers
effective February 1, 2018, which will result in timing and
presentation changes affecting our consolidated balance sheet and statement of operations . Under ASC 606, product revenue for sales made
through our channel partners will be recognized upon the sale to the partners (sell-in basis) instead of upon resale by the partners to the end
customers (sell-through basis). Beginning with the first quarter of fiscal 2019, we will also defer all incremental commission costs of acquiring
customer contracts and amortize them to sales and marketing expense over an estimated customer life of five years. Previously, we expensed sales
commissions as incurred. Refer to Note 3: Recent
Accounting
Standards
in the notes to our consolidated financial statements for additional details
regarding our evaluation of ASC 606.
Key Business Metrics
We review the key metrics below to evaluate our business, measure our performance, identify trends affecting our busin ess, formulate financial
projections and make strategic decisions. Key business metrics exclude Business Promoter data for all periods presented because it is not part of
our primary cloud communications business. We believe that this change enables us to better evaluate the performance of our primary cloud
communications business in a given period compared to those in prior and future periods.
Ooma Inc. | FY2018 Form 10-K | 41
The following table sets forth our key metrics for each of the periods indicated (in thousands , except percentage s ):
Core users
Annual Exit Recurring Revenue (AERR)
Net Dollar Subscription Retention Rate
Adjusted EBITDA
2018
929
102,992
$
101%
(217)
$
$
$
As of January 31,
2017
2016
858
85,247
$
96%
(1,414)
$
746
71,365
101%
(6,512)
Core Users increased 8% year-over-year, which was primarily driven by growth in both business and residential 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 active residential user accounts and office user extensions. 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.
Annualized Exit Recurring Revenue increased year-over-year due to an increase in the average revenue per core user, which was driven by
the increase in total Office core users and in part by the changes made to our residential customer pricing structure in October 2017. We believe that
AERR is an indicator of recurring subscription and services revenue for near-term future periods. We estimate our AERR by dividing our recurring
quarterly subscription revenue (excluding Talkatone revenue) by the average number of core users each 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.
Net Dollar Subscription Retention Rate increased year-over-year due to an increase in the average revenue per core user as we continued
to offer more services to our customers and in part due to the changes made to our residential customer pricing structure in October 2017. We
believe that our net dollar subscription 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. It measures the percentage year-over-year
change in our recurring subscription revenue per core user (excluding Talkatone revenue), which is then adjusted by factoring in the percentage of
our core users we have retained during the same period. Our net dollar subscription 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 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:
by:
(ii)
▪
▪
▪
▪
▪
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.
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.
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 our operating performance, because it contains adjustments for unusual events or factors that do not directly affect what
management considers being the core operating performance, and are used by our management for that purpose. We also believe this measure
enables us to better evaluate our performance by facilitating a meaningful 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, depreciation and amortization, stock-based compensation and related taxes, and acquisition-
related costs.
Ooma Inc. | FY2018 Form 10-K | 42
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 our business;
Adjusted EBITDA does not consider the impact of stock-based compensation and related taxes, amortization of acquired intangible
assets and other acquisition-related charges, changes in in the fair value of acquisition-related contingent consideration and stock
warrants, 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 and other
income/expense; 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):
Net loss
Interest and other (income) expense, net
Depreciation and amortization
Acquisition-related costs and intangible amortization
Stock-based compensation and related taxes
Write-off of non-cash deferred debt issuance costs
Change in fair value of warrant liability
Change in fair value of acquisition-related contingent consideration
Adjusted EBITDA
Components of Results of Operations
Revenue
2018
Fiscal Year Ended January 31,
2017
2016
$
(13,121)
$
(12,949)
$
(603)
1,958
431
11,118
—
—
—
(217) $
(327)
1,648
348
9,866
—
—
—
(1,414) $
$
(14,052)
591
1,410
393
4,653
332
442
(281)
(6,512)
Subscription and services revenue is comprised primarily of recurring subscription fees from customers accessing our communications
solutions, such as Ooma Telo, Ooma Office, international calling plans and other subscriptions. Revenue is also generated from payments
associated with directory assistance and advertisements through the Talkatone mobile application. We expect our subscription and services revenue
to increase as we continue to expand our core user base, driven primarily by growth in Ooma Office.
Product and other revenue consists primarily of the sale of our on-premise appliances and end-point devices used in connection with our
services (including shipping and handling fees for our direct customers), as well as 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.
Cost of revenue and gross margin
Cost of subscription and services revenue includes payments made 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 and maintenance of servers and equipment, personnel costs associated with customer care and network operations support,
and allocated costs of facilities and information technology.
Cost of product and other revenue includes 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.
Ooma Inc. | FY2018 Form 10-K | 43
Subscription and services gross margin may fluctuate from period-to-period based on the interplay of a number of factors, including the
costs we pay to third-party telecommunications providers, the timing of ca pital expenditures and related depreciation charges , and changes in our
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 business revenue
becomes a larger portion of total subscription revenue.
Product and other gross margin may fluctuate from period-to-period based on a number of factors, including total units shipped during a
period as compared to the direct costs of production and relatively fixed personnel costs incurred during the period. We sell our on-premise
appliances at an aggressive price point to facilitate the adoption of our platform. We 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 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 be impacted.
Operating expenses
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 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 increase in absolute dollars as we continue
to actively grow our core users and expand our operations internationally.
Research and development expenses are focused on developing new and expanded features for our services and improvements to our
platform and backend architecture. Research and development is expensed as incurred and consists primarily of personnel costs for employees and
contractors, allocated costs of facilities and information technology, software tools and product certification. We expect our research and
development expenses to continue to grow in absolute dollars and as a percentage of total revenue.
General and administrative expenses consist of personnel costs for our finance, legal, human resources and other administrative employees.
In addition, it includes professional service fees, legal fees and allocated costs of facilities and information technology. We expect our general and
administrative expenses to remain relatively flat as a percentage of total revenue going forward.
Ooma Inc. | FY2018 Form 10-K | 44
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data 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 and other income (expense), net
Change in fair value of warrants
Net loss
2018
Fiscal Year Ended January 31,
2017
2016
$
101,999 $
12,491
114,490
91,127 $
13,397
104,524
31,406
14,992
46,398
68,092
37,302
29,328
15,186
81,816
(13,724)
603
—
29,650
15,545
45,195
59,329
33,768
24,239
14,598
72,605
(13,276)
327
—
$
(13,121) $
(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)
(923)
(442)
(14,052)
(1)
Includes stock-based compensation expense and related payroll taxes as follows (in thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
Total
2018
Fiscal Year Ended January 31,
2017
2016
$
$
1,129 $
1,857
4,046
4,086
11,118 $
1,038 $
1,455
3,619
3,754
9,866 $
437
611
1,683
1,922
4,653
Consolidated Statement of Operations: Comparison of fiscal 2018, 2017 and 2016 (dollars in tables are 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,
Change
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
$
$
101,999
12,491
114,490
$
$
91,127
13,397
104,524
$
$
73,064
15,711
88,775
$
$
10,872
(906)
9,966
12% $
(7)%
10% $
18,063
(2,314)
15,749
25%
(15)%
18%
89%
11%
100%
87%
13%
100%
82%
18%
100%
Ooma Inc. | FY2018 Form 10-K | 45
Fiscal 2018 Compared to Fiscal 2017
Subscription and services revenue increased $10.9 million, or 12%, year-over-year, driven by a 59% increase in revenue from Ooma Office and
a 12% increase from Ooma Telo, offset in part by a decline in revenue from Talkatone and Business Promoter. Year-over-year revenue growth
reflected an 8% increase in our core users to approximately 929,000 as of January 31, 2018 from approximately 858,000 as of January 31, 2017, as
well as changes to our residential customer pricing structure that were implemented in October 2017. Revenue earned from Business Promoter
declined to approximately $1.8 million in fiscal 2018 from approximately $5.4 million in the prior year, due to our sale of the Business Promoter
service in early August 2017.
The year-over-year decline in product and other revenue was primarily attributable to lower Telo-related sales, offset in part by growth in unit
sales of home security sensors and end-point devices.
Fiscal 2017 Compared to Fiscal 2016
Subscription and services revenue increased by $18.1 million in fiscal 2017 as compared to fiscal 2016, primarily due to growth in our core
users which increased to approximately 858,000 core users as of January 31, 2017 from approximately 746,000 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.
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 2018 Compared to Fiscal 2017
Fiscal Year Ended January 31,
Change
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
$
$
$
$
31,406
14,992
46,398
70,593
(2,501)
68,092
$
$
$
$
29,650
15,545
45,195
61,477
(2,148)
59,329
$
$
$
$
25,715
16,150
41,865
47,349
(439)
46,910
$
$
$
$
1,756
(553)
1,203
9,116
(353)
8,763
6% $
(4)%
3% $
3,935
(605)
3,330
15%
(4)%
8%
15% $
16%
15% $
14,128
(1,709)
12,419
30%
389%
26%
69%
(20)%
59%
67%
(16)%
57%
65%
(3)%
53%
Total gross margin increased to 59% in fiscal 2018 as compared to 57% in fiscal 2017, primarily due to higher proportionate growth of
subscription and services revenue. The improvement in gross margin was driven by higher revenues from Ooma Office and the benefits of scale on
a larger core user base. Product and other revenue gross margin of (20%) decreased year-over-year from (16%) due to a decrease in the sale of
end-point devices and related porting fees.
Cost of subscription and services revenue for fiscal 2018 increased $1.8 million year-over-year, reflecting a $0.9 million increase in credit card
processing fees, a $0.7 million increase in network infrastructure related costs, driven by our international expansion, and to a lesser extent
increases in personnel and consultant costs that were partly offset by a decline in the Business Promoter cost of sales due to our sale of the
Business Promoter service in August 2017.
The decrease in cost of product and other revenue of $0.6 million reflected higher freight costs due to increased direct consumer shipments in
fiscal 2018 as compared to fiscal 2017.
Fiscal 2017 Compared to Fiscal 2016
Total gross margin increased to 57% in fiscal 2017 as compared to 53% in fiscal 2016, primarily due to higher proportionate growth of
subscription and services revenue (as subscription and services revenue carries higher gross margin). The improvement in gross margin was
primarily due to higher revenues from Ooma Office and also due to benefits of scale as our subscriber base increased.
Ooma Inc. | FY2018 Form 10-K | 46
Cost of subscription and services revenue for fiscal 2017 increased $3.9 million year-over-year, reflecting a $1.6 millio n increase in telecom
and hosting fees , driven by growth in our core users; a $0.9 million increase in credit card processing fee s, a $0.7 million increase in personnel and
consultant costs, driven by increased headcoun t and growth in business; and a $0.5 million increase in stock-based compensation.
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
Sales and Marketing
Fiscal Year Ended January 31,
2018
2017
2016
$
$
$
37,302
29,328
15,186
81,816 $
33,768 $
24,239
14,598
72,605 $
28,534 $
18,502
12,561
59,597 $
2018 vs. 2017
3,534
5,089
588
9,211
Change
10% $
21%
4%
13% $
2017 vs. 2016
5,234
5,737
2,037
13,008
18%
31%
16%
22%
Fiscal 2018 Compared to Fiscal 2017. Sales and marketing expenses for fiscal 2018 increased $3.5 million or 10% year-over-year, due to a
$3.7 million increase in sales commissions, a net $1.1 million increase in personnel and consultant related costs, driven by higher headcount,
coupled with a $0.6 million increase in facilities related costs and a $0.4 million increase in stock-based compensation. These higher expenses were
offset in part by a net $2.6 million decrease in marketing activities, primarily Telo-related advertising expenses. The year-over-year growth in sales
and marketing supported the expansion of our sales efforts to drive growth in our small business solutions.
Fiscal 2017 Compared to Fiscal 2016 .
Sales and marketing expenses for fiscal 2017 increased $5.2 million or 18% year-over-year, due to a
$3.2 million increase in personnel and consultant related costs, driven by higher headcount and growth in business, a $0.8 million increase in stock-
based compensation, a $0.7 million increase in marketing activities and a $0.4 million increase in facilities and equipment related costs.
Research and Development
Fiscal 2018 Compared to Fiscal 2017. Research and development expenses for fiscal 2018 increased $5.1 million or 21% year-over-year,
primarily due to a $3.5 million increase in personnel and consultant related costs , driven by higher headcount, a $1.0 million increase in facilities,
supplies and equipment related costs and a $0.4 million increase in stock-based compensation. The year-over-year growth in research and
development supported the continued development of our office platform, including international expansion and the launch of WeWork locations, as
well as adding new features and product offerings to our home security solution.
Fiscal 2017 Compared to Fiscal 2016 . Research and development expenses for fiscal 2017 increased $5.7 million or 31% year-over-year,
primarily attributable to a $3.2 million increase in personnel and consultant related costs, driven by higher headcount to support Ooma Office growth,
a $1.9 million increase in stock-based compensation and a $0.5 million increase in facilities and equipment related costs.
General and Administrative
Fiscal 2018 Compared to Fiscal 2017. General and administrative expenses for fiscal 2018 increased $0.6 million or 4% year-over-year,
reflecting a $1.0 million increase in personnel and consultant related costs and stock-based compensation costs, driven by higher headcount, offset
in part by a $0.5 million decrease in legal expenses.
Fiscal 2017 Compared to Fiscal 2016 . General and administrative expenses for fiscal 2017 increased $2.0 million or 16% year-over-year,
which was primarily attributable to a $1.8 million increase in stock-based compensation and a $0.4 million increase in legal and professional services
fees, offset in part by a $0.3 million decrease in consultant costs.
Ooma Inc. | FY2018 Form 10-K | 47
Other Income (Expense), net
Other income (expense) is comprised mainly of interest income related to our short-term investments during fiscal 2018 and 2017, as well as
debt-related interest expense and stock warrant charges during fiscal 2016.
Interest and other income (expense), net
Change in fair value of warrants
Total interest and other income (expense), net
Fiscal 2018 Compared to Fiscal 2017
Fiscal Year Ended January 31,
Change
2018
2017
2016
2018 vs. 2017
$
$
$
603
—
603 $
327 $
—
327 $
(923) $
(442)
(1,365) $
276 $
—
276 $
2017 vs. 2016
1,250
442
1,692
Other income, net increased by $0.3 million in fiscal 2018 as compared to fiscal 2017 due to higher interest income earned from our short-term
investment portfolio.
Fiscal 2017 Compared to Fiscal 2016
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.
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 Adjusted EBITDA (see above). These non-GAAP financial measures exclude non-cash or non-recurring expenses
including stock-based compensation expense and related taxes, amortization of intangibles, acquisition-related costs, change in fair value of
acquisition-related contingent consideration, change in fair value of warrants and write-off of non-cash deferred debt issuance costs.
These non-GAAP financial measures are presented to provide investors with additional information regarding our financial results and core
business operations. O oma 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.
Non-GAAP financial 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 with 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 adjustment 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 should be considered together.
Reconciliations of our GAAP and non-GAAP financial measures were as follows (in thousands):
GAAP net loss
Stock-based compensation and related taxes
Acquisition-related costs and intangible amortization
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
Non-GAAP net loss
$
2018
Fiscal Year Ended January 31,
2017
2016
(13,121) $
11,118
431
—
—
—
(1,572) $
(12,949) $
9,866
348
—
—
—
(2,735) $
(14,052)
4,653
393
(281)
442
332
(8,513)
Ooma Inc. | FY2018 Form 10-K | 48
Quarterly Results of Operations and Trends
The following table sets forth selected quarterly financial data for each of the eight quarterly periods ended January 31, 2018 (in thousands,
except percentages):
Fiscal 2018
Total revenue
Gross profit
Gross margin
Total operating expenses
Net loss
Fiscal 2017
Total revenue
Gross profit
Gross margin
Total operating expenses
Net loss
$
$
$
$
$
$
$
$
January 31
October 31
July 31
April 30
Three Months Ended
30,220
18,312
$
$
61%
$
$
21,419
(2,927)
27,564
15,788
$
$
57%
$
$
18,701
(2,832)
28,505
17,166
$
$
60%
$
$
20,493
(3,179)
27,007
15,343
$
$
57%
$
$
18,251
(2,821)
28,187
16,581
$
$
59%
$
$
20,373
(3,623)
25,494
14,549
$
$
57%
$
$
17,962
(3,340)
27,578
16,033
58%
19,531
(3,392)
24,459
13,649
56%
17,691
(3,956)
Revenue . Our total revenue has grown quarter-over-quarter primarily due to the continued growth in our subscriber base driven by an increase in
our core users.
Gross Profit and Gross Margin . Over the past eight fiscal quarters, our gross profit has increased sequentially each quarter in absolute dollars
and gross margin has increased from 56% to 61%, reflecting the increasing mix of subscription and services revenue as a percentage of total
revenue.
Operating Expenses . Our quarterly operating expenses in absolute dollars increased sequentially for all the periods presented, primarily driven by
growing employee and contingent headcount and personnel-related expenses, as well as marketing and advertising expenses associated with our
efforts to increase our overall subscriber base and product sales.
Liquidity and Capital Resources
As of January 31, 2018, we had $51.8 million of total cash and investments. To date, we have funded our operations primarily through sales to
our customers as well as proceeds from our IPO in July 2015 . We believe that our existing cash, 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. W e may in the future make investments in or
acquisitions of businesses or technologies, which may require the use of cash. For example, in the first quarter of fiscal 2019, we entered into a
definitive agreement to acquire Voxter Communications for cash and stock consideration of approximately $3.6 million.
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 increase (decrease) in cash and cash equivalents
2018
Fiscal Year Ended January 31,
2017
2016
$
$
$
3,173
(2,155)
(525)
493 $
$
385
(22,969)
(839)
(23,423) $
(470)
(30,962)
49,712
18,280
Ooma Inc. | FY2018 Form 10-K | 49
Operating Activities
The table below provides selected cash flow information, for the periods indicated (in thousands):
Net loss
Non-cash charges
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
Decrease (increase) in inventories and deferred inventory costs
(Increase) decrease in prepaid expenses and other assets
Increase (decrease) in accounts payable and other liabilities
(Decrease) increase in deferred revenue
Net cash provided by (used in) operating activities
2018
Fiscal Year Ended January 31,
2017
2016
$
(13,121)
13,327
$
(12,949)
11,979
$
(14,052)
7,013
1,856
310
(1,519)
2,366
(46)
3,173 $
895
(426)
84
(156)
958
385 $
(1,215)
3,305
(470)
4,260
689
(470)
$
For fiscal 2018, our net loss of $13.1 million included non-cash charges of $13.3 million primarily related to stock-based compensation and
depreciation and amortization. Operating asset and liability changes for fiscal 2018 included:
•
•
•
•
a decrease of $1.9 million in accounts receivable primarily due to timing of billing and our cash collections, driven by lower revenue from
Talkatone during fiscal 2018 as well as due to the sale of the Business Promoter service in August 2017
an increase of $2.4 million in accounts payable and accrued liabilities primarily due to the timing of payments and reflecting higher
operating expenses compared to the prior year
a net increase of $1.5 million in prepaid expenses and other assets due to the timing of certain payments
a net decrease of $0.3 million in our inventory and related deferred costs, reflecting lower inventory levels at channel partners
The net $2.8 million increase in operating cash flow from fiscal 2017 to fiscal 2018 was primarily due to increased cash collections from our
customers, driven by revenue growth year-over-year, as well as favorable changes in operating assets and liabilities.
For fiscal 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 fiscal 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
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.
The net $0.9 million increase in operating cash flow from fiscal 2016 to fiscal 2017 was primarily due to favorable changes in operating assets
and liabilities.
Investing Activities
Our investing activities include short-term investment activities, capital expenditures 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 fiscal 2018, we used $2.2 million in investing activities for purchases of short-term investments of $49.3 million, purchases of property
and equipment of $2.5 million, and a business acquisition for $1.4 million, offset by proceeds from maturities and sales of short-term investments
totaling $51.0 million. The decrease in cash outflow from fiscal 2017 to fiscal 2018 was attributable primarily to activity in our investment portfolio,
reflecting a decrease in investment purchases and an increase in maturities.
Ooma Inc. | FY2018 Form 10-K | 50
During fiscal 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. The decrease in cash
outflow from fiscal 2016 to fiscal 2017 was attributable primarily to the absence of maturities of short-term investments in fiscal 2016.
Financing Activities
Cash generated from financing activities include net proceeds from common stock issuances related to employee stock benefit plans and
proceeds from borrowings, if any, under our credit facilities, if any. 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 2018, financing activities used $0.5 million of cash, which consisted of payment of $2.4 million related to shares repurchased for
tax withholdings on vesting of restricted stock units , offset by proceeds of $1.9 million from the issuance of common stock related to our employee
stock purchase plan and stock option exercises.
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 .
In comparison, fiscal 2016 financing activities generated cash inflows of $49.7 million due to net proceeds of $57.0 million from our IPO in July
2015, as well as net proceeds of $5.0 million from preferred stock, that were partly offset by $11.6 million for debt repayments.
Contractual Obligations and Commitments
As of January 31, 2018, our total future expected payment obligations under non-cancelable agreements with terms longer than one year were
approximately $4.3 million. See Note 11 Commitments
and
Contingencies
in the notes to our consolidated financial statements for a table of
contractual obligations, including payments due by period. As of January 31, 2018, non-cancelable purchase commitments with our contract
manufacturers totaled approximately $3.3 million.
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. Note 2 to the
notes to consolidated financial statements of this Form 10-K describes the significant accounting policies and methods used in the preparation of the
consolidated financial statements. We believe that the accounting policies discussed below are critical to understanding our historical and future
performance as these policies involve a greater degree of judgment and complexity.
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. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred,
collection of the fees is reasonably assured and the fee is fixed or determinable. For all periods presented, we recognized revenue in accordance
with ASC Topic 605, Revenue
Recognition
.
Subscription revenue is derived primarily from recurring monthly and annual payments related to service plans such as Ooma Office, Ooma
Telo, international calling plans and other subscriptions. Subscription revenue is recognized on a straight-line basis over the applicable contractual
service term. Product and other revenue is generated from the sale of on-premise appliances and end-point devices, including shipping and
handling fees, as well as from porting fees that enable customers to transfer their existing phone numbers. 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
Ooma Inc. | FY2018 Form 10-K | 51
from our channel partners). Accordingly, we defer product revenue and related costs of revenue on these product channel sales until the title
transfers to the end-customer. See Note 2: Significant
Accounting
Policies
in the notes to our consolidated financial s tatements for additional
information regardi ng our subscription and services revenue and product and other revenue.
Substantially all of our revenue arrangements are multiple-element arrangements, which consist of an on-premise appliance and telephony
services, which is available on a subscription plan. Telephony services and end-point devices purchased after a customer’s original arrangement are
optional purchases that are accounted for as separate arrangements. 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.
We determine VSOE of selling price for telephony services and end-point devices 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. The determination of BESP is
made through consultation with and approval by our management. As our business offerings evolve over time, we may be required to modify our
estimated selling prices in subsequent periods, and the timing of our revenue recognition could be affected.
Sales
Reserves.
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. To date, actual results have not been materially different from our estimates.
New
Revenue
Recognition
Standard.
On February 1, 2018, the Company adopted Accounting Standards Update, or ASU, 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606).
The new standard will impact the way we recognize our product revenue for sales made through our
channel partners, whereby revenue will be recognized upon the sale to the partners (sell-in basis) instead of our current recognition upon resale by
the partners to the end customers (sell-through basis). Refer to Note 3: Recent
Accounting
Standards
in the notes to our consolidated financial
statements.
Inventories
At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence based on projected future demand,
actual historical experience and remaining shelf life. We adjust our inventory balances to approximate the lower of our standard manufacturing cost
or net realizable value. In determining the adequacy of inventory write-downs, we analyze the following, among other things:
•
•
•
•
•
•
•
current inventory quantity on hand;
product acceptance and competitiveness in the marketplace;
customer demand;
historical sales;
forecast sales;
product life cycles and obsolescence, and;
technological innovations
Inventory write downs for excess and obsolete inventory 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. This would have a negative impact on our gross
margin in that period. If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related
revenues would be recorded without any offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period.
Inventory write-downs recorded for fiscal 2018, 2017 and 2016 were not material.
Ooma Inc. | FY2018 Form 10-K | 52
Stock-Based Compensation
Stock-based compensation expense for all stock-based awards granted 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 restricted stock unit (“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 Employee Stock
Purchase Plan (“ESPP”) is calculated based on the closing price of our stock on the date of grant and the value of put and call options is estimated
using the Black-Scholes option pricing model.
The determination of the grant date fair value of options using an option-pricing model is affected by our common stock fair value as well as
assumptions regarding a number of variables, of which the most subjective were estimated as follows:
•
•
Expected
Term.
We do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term
due to the limited period of time stock-based awards have been exercisable since the completion of our IPO in July 2015. As a result, we
used the simplified method to calculate the expected term estimate based on the vesting and contractual terms of the option. Under the
simplified method, the expected term is equal to the average of the stock-based award’s weighted average vesting period and its
contractual term.
Volatility.
As we do not have a significant trading history for our common stock, the expected stock price volatility for our common stock
was estimated by taking the average historic volatility of the common stock of a group of comparable publicly traded companies over a
period equivalent to the expected term.
Refer to Note 8: Stock-Based
Compensation
in the notes to our consolidated financial statements for additional information on our estimates
related to stock-based compensation.
Income Taxes
We account for income taxes using the asset and liability method, 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. We have recorded a full valuation allowance against our deferred tax assets as of January 31, 2018 and 2017.
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. Deferred tax assets associated with our unrecognized tax benefits were fully offset by a valuation allowance as of January 31, 2018 and
2017.
Ooma Inc. | FY2018 Form 10-K | 53
ITEM 7A. Quantitative and Qualitat ive Disclosures About Market Risk
Interest Rates
Our exposure to market risk for changes in interest rates primarily relates to our cash and cash equivalents and short-term investments. Our
cash equivalents and investments are held in money market funds, 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 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, 2018 and 2017, or our interest income for each of the three years in the period
ended January 31, 2018. W e did not hold any debt as of January 31, 2018 and 2017.
Foreign Currencies
To date, substantially 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 U.S. dollar. Substantially all of our operating expenses have been denominated in
U.S. dollars. The functional currency for all of our entities is the U.S. dollar. To date, gains and losses from foreign currency transactions 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.
Ooma Inc. | FY2018 Form 10-K | 54
ITEM 8 . C onsolidated Financial Statements and Supplementary Data
Index
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Ooma Inc. | FY2018 Form 10-K | 55
56
57
58
59
60
61
REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Ooma, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ooma, Inc. and subsidiaries (the "Company") as of January 31, 2018 and 2017,
the related consolidated statements of operations, convertible preferred stock and stockholders' equity (deficit), and cash flows, for each of the three
years in the period ended January 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of January 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended January 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to
obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/
DELOITTE
&
TOUCHE
LLP
San Jose, California
March 30, 2018
We have served as the Company's auditor since 2012.
Ooma Inc. | FY2018 Form 10-K | 56
OOMA, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
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
Deferred revenue
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock $0.0001 par value: 10 million shares authorized; no shares issued and outstanding on January
31, 2018 and 2017, respectively
Common stock $0.0001 par value: 100 million shares authorized; 19.1 million and 18.0 million shares issued and
outstanding on January 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
Ooma Inc. | FY2018 Form 10-K | 57
January 31,
2018
January 31,
2017
$
$
$
$
4,483 $
47,307
2,858
6,079
1,061
3,336
65,124
4,732
1,292
1,947
336
73,431 $
5,453 $
14,777
15,556
35,786
577
36,363
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
—
—
2
128,081
(84)
(90,931)
37,068
73,431 $
2
117,639
(11)
(77,810)
39,820
73,338
OOMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
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 and other income (expense), net
Change in fair value of warrants
Net loss
2018
Fiscal Year Ended January 31,
2017
2016
$
101,999 $
12,491
114,490
91,127 $
13,397
104,524
31,406
14,992
46,398
68,092
37,302
29,328
15,186
81,816
(13,724)
603
—
29,650
15,545
45,195
59,329
33,768
24,239
14,598
72,605
(13,276)
327
—
$
(13,121) $
(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)
(923)
(442)
(14,052)
Net loss per share of common stock:
Basic and diluted
Weighted-average number of shares used in per share amounts:
Basic and diluted
$
(0.71) $
(0.74) $
(1.38)
18,570,128
17,490,448
10,173,095
See notes to consolidated financial statements.
Ooma Inc. | FY2018 Form 10-K | 58
OOMA, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIT)
(Amounts in thousands, except shares and share data)
Convertible Preferred Stock
Common Stock
Additional
Paid‑‑In Capital
Shares
8,353,748 $
Amount
Shares
Amount
Income (Loss)
Deficit
33,637
2,515,065 $
— $
5,611 $
— $
(50,756 ) $
Equity (Deficit)
(45,145 )
Accumulated
Other
Comprehensive
Accumulated
Stockholders'
241,469
5,000
—
—
—
(8,595,217 )
(38,637 )
8,878,857
—
5,000,000
1
1
38,636
56,878
—
—
1,075
49,159
—
426,075
47,094
—
—
—
16,916,250
—
—
—
—
—
2
451
331
44
4,653
—
—
107,679
26,375
—
165
1,223,211
—
1,558
(170,281 )
—
—
—
—
17,995,555
—
—
—
—
—
2
(1,588)
9,772
—
53
—
117,639
—
—
—
—
—
—
—
—
17
—
17
—
—
—
—
(28)
—
—
(11)
—
—
—
38,637
—
56,879
—
—
—
—
—
—
(14,052 )
(64,808 )
—
—
—
—
—
(53)
(12,949 )
(77,810 )
1,075
451
331
44
4,653
17
(14,052 )
42,890
165
1,558
(1,588)
9,772
(28)
—
(12,949 )
39,820
BALANCE - January 31, 2015
Issuance of Series Beta preferred stock,
net
Conversion of preferred stock to
common stock upon IPO (see Note 7)
Issuance of common stock upon IPO,
net
Reclassification of preferred warrant
liability
Issuance of common stock related to
acquisition
Issuance of common stock under equity
based plans
Exercise of warrants to common stock
Stock-based compensation
Other comprehensive income
Net loss
BALANCE - January 31, 2016
Issuance of common stock related to
acquisition
Issuance of common stock under equity
based plans
Shares repurchased for tax withholdings
on vesting of RSUs
Stock-based compensation
Other comprehensive loss
Cumulative stock-based compensation
forfeiture adjustment
Net loss
BALANCE - January 31, 2017
Issuance of common stock under equity
based plans
Shares repurchased for tax withholdings
on vesting of RSUs
Exercise of warrants to common stock
Stock-based compensation
Other comprehensive loss
Net loss
BALANCE - January 31, 2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,345,392
—
1,964
—
—
1,964
(244,865 )
19,352
—
—
—
19,115,434 $
—
—
—
—
—
2 $
(2,443)
—
10,921
—
—
128,081 $
—
—
—
(73)
—
(84) $
—
—
—
—
(13,121 )
(90,931 ) $
(2,443)
—
10,921
(73)
(13,121 )
37,068
See notes to consolidated financial statements.
Ooma Inc. | 2018 Form 10-K | 59
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 of property and equipment
Amortization of acquired intangible assets
Amortization and accretion of premiums from investments
Write-off of non-cash deferred debt issuance costs
Net changes in fair value of warrants and contingent liability
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
Inventories
Deferred inventory costs
Prepaid expenses and other assets
Accounts payable and other liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of short-term investments
Proceeds from maturities of short-term investments
Proceeds from sales 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:
Shares repurchased for tax withholdings on vesting of RSUs
Proceeds from issuance of common stock
Proceeds from initial public offering and preferred stock, net
Repayment of debt, capital leases and warrants
Payment of acquisition related earn-out
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Income taxes paid
Interest paid
Non-cash investing and financing activities:
Unpaid portion of property and equipment purchases
Contingent consideration for business acquisition
Shares issued for business acquisition and related earn-out
Conversion of preferred stock to common stock
De-recognition of warrant liability to additional paid-in capital
Fiscal Year Ended January 31,
2018
2017
2016
$
(13,121)
$
(12,949) $
(14,052)
10,921
1,958
313
135
—
—
1,856
(249)
559
(1,519)
2,366
(46)
3,173
(49,331)
49,217
1,800
(2,478)
(1,363)
(2,155)
(2,443)
1,918
—
—
—
(525)
493
3,990
4,483
—
—
146
311
—
—
—
$
$
$
$
$
$
$
$
9,772
1,648
348
211
—
—
895
(819)
393
84
(156)
958
385
(59,007)
32,330
5,266
(1,558)
—
(22,969)
(1,588)
1,477
—
(628)
(100)
(839)
(23,423)
27,413
3,990 $
3 $
18 $
122 $
— $
165 $
— $
— $
4,653
1,410
393
64
332
161
(1,215)
3,070
235
(470)
4,260
689
(470)
(28,078)
—
—
(2,884)
—
(30,962)
—
221
62,021
(12,204)
(326)
49,712
18,280
9,133
27,413
2
573
78
—
451
38,637
1,075
$
$
$
$
$
$
$
$
See notes to consolidated financial statements.
Ooma Inc. | FY2018 Form 10-K | 60
Ooma, Inc.
Notes to Consolidated Financial Statements
Note 1: Overview and Basis of Presentation
Ooma, Inc. and its wholly-owned subsidiaries (collectively, “Ooma” or the “Company”) create new communications experiences for businesses and
consumers. The Company’s smart SaaS platform serves as a communications hub, which offers cloud-based telephony, home security and other
connected services.
Principles of Presentation and Consolidation. The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated upon consolidation. In the opinion of the Company’s management, the consolidated financial
statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
Fiscal Year . T he Company’s fiscal year ends on January 31. References to fiscal 2018, fiscal 2017 and fiscal 2016 refer to the fiscal years ended
January 31, 2018, January 31, 2017 and January 31, 2016, respectively.
Use of Estimates. The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ
materially from those estimates.
Comprehensive Loss. For all periods presented, comprehensive loss approximated net loss in the consolidated statements of operations.
Therefore, the consolidated statements of comprehensive loss have been omitted.
Note 2: Significant Accounting Policies
Revenue Recognition . The Company derives its revenue from two sources: (1) subscription and services revenue, which are generated from
sales of subscription plans for communications solutions and other connected 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;
the
service
has
been
or
is
being
provided
to
the
customer,
and
product
delivery
has
occurred;
collection
of
the
fees
is
reasonably
assured;
and
the
amount
of
fees
to
be
paid
by
the
customer
is
fixed
or
determinable.
Subscription
and
Services
Revenue.
Most of the Company’s revenue is derived from recurring monthly and annual subscription fees related to
service plans such as Ooma Office, Ooma Telo, international calling plans and other subscriptions. Subscription revenue is recognized on a straight-
line basis over the contractual service term. Revenue is also generated from billings for prepaid international calls and directory assistance, which
are recognized based on actual usage. A small portion of revenue is earned and recognized on a net basis from advertisements displayed through
the Company’s Talkatone mobile application. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or
revenue, depending on whether the revenue recognition criteria have been met. See “Deferred Revenue” below.
Product
and
Other
Revenue.
Product and other revenue is generated from the sale of on-premise appliances and end-point devices, including
shipping and handling fees, as well as from porting fees that enable customers to transfer their existing phone numbers. The Company normally
recognizes revenue from sales to direct end-customers at the time the product is shipped. 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, resulting in the pricing for these
transactions not being fixed or determinable. Accordingly, the Company defers product revenue and related costs of revenue on these sales until
the title transfers to the end-customer. Revenue is recorded net of any sales-related and telecommunications taxes that are billed to customers.
Ooma Inc. | 2018 Form 10-K | 61
Ooma, Inc.
Notes to Consolidated Financial Statements
Multiple-element
Arrangements.
Substantially all of the Company’s arrangements are multiple-element arrangements, which consist of an on-
premise appliance and telephony services, which is available on a subscription plan. Telephony services and end-point devices purchased after a
cust omer’s original arrangement are optional purchases that are accounted for as separate arrangements. The Company accounts for each element
separately and allocates revenue based on the estimated selling price for each deliverable. The Company determines VSO E 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 wi thin 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, an d bundling and discounting practices.
The Company does not have VSOE or third-party evidence for its on-premise appliance and allocates revenue based on its best estimate of the
selling price, or BESP. The process for determining BESP considers company-specific factors such as pricing strategies, estimated product and
other costs, and bundling and discounting practices. The determination of BESP is made through consultation with and approval by the Company’s
management.
Deferred
Revenue.
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 classified in long term liabilities on the consolidated balance
sheets.
Sales
Reserves.
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.
Shipping
and
Handling
Costs.
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s
shipping and handling costs are expensed as incurred and classified as cost of revenue .
Cash Equivalents and Short-term Investments . All highly liquid investments with an original maturity of three months or less at the date of
purchase are classified as cash equivalents. Short-term investments are classified as available-for-sale and carried at fair value, with unrealized
gains and losses, net of tax, recorded as a separate component of stockholders’ equity within accumulated other comprehensive (loss) income. All
realized gains and losses and unrealized losses believed to be other-than-temporary are recorded in other expense, net in the current period. The
cost of securities sold is based upon the specific identification method.
Fair Value of Financial Instruments. The Company records its financial assets and liabilities at fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The
Company estimates and categorizes the fair value of its financial assets by applying the following hierarchy:
▪
▪
▪
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable prices based on inputs not quoted in active markets, but are corroborated by market data.
Level 3: Unobservable inputs that are supported by little or no market activity
Transfers among Level 1, Level 2 and Level 3 classifications are recognized as of the actual date of the events or change in circumstances that
caused the transfers. The carrying value 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.
Th e chief operating decision maker for the Company is the chief executive officer. The Company’s subscription plans,
services and product offerings operate on a single SaaS platform and 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.
Substantially all revenue, based on customer billing addresses, was derived from customers in the United States for all periods presented.
All of the Company’s long-lived assets were attributable to operations in the United States for all periods presented.
Ooma Inc. | FY2018 Form 10-K | 62
Ooma, Inc.
Notes to Consolidated Financial Statements
Concentration of Credit Risk . Financial instruments that potentially subject the Company to a concentration of credi t risk consist cash
equivalents, short-term investments and accounts receivables. The Company’s cash equivalents and short-term investments are held by financial
institutions that management believes are of high-credit quality. Such investments and deposit s 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.
C ustomers who represented 10% or more of the Company's net accounts receivable balance were as follows:
Customer A
Customer B
*
Represented less than 10% accounts receivable, net at the end of respective periods.
As of January 31,
2018
2017
10%
*
*
11%
No single customer accounted for 10% or more of the Company’s consolidated revenues in fiscal 2018, 2017 and 2016.
Accounts Receivable Allowances. Accounts receivable are stated at invoice value less estimated allowances for returns and doubtful accounts.
The Company records its allowances based upon its assessment of several factors, including historical experience, aging of receivable balances and
economic conditions. As of January 31, 2018 and 2017, the Company recorded allowances for doubtful accounts and returns of $0.4 million and
$0.2 million, respectively.
Inventories. Inventories, which consist of raw materials and finished goods, include the cost to purchase manufactured products, allocated labor
and overhead. Inventories are stated at the lower of cost or market on a first-in, first-out basis. The Company writes down its inventory for estimated
excess and obsolete inventory based upon management’s assessment of future demand and market conditions, and establishes a new cost basis
for the inventory. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.
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 website
development costs of approximately $0.6 million, $0.4 million and $0.5 million in fiscal 2018, 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.
Goodwill and Intangible Assets . Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business
combination. The Company performs an impairment test of its goodwill in the fourth quarter of its fiscal year, 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 recognized for any of the periods presented. Acquired intangible assets other
than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. For intangible assets acquired in a business
combination, the estimated fair values of the assets received are used to establish their recorded values. Valuation techniques consistent with the
market approach, income approach and/or cost approach are used to measure fair value.
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.
Ooma Inc. | FY2018 Form 10-K | 63
Ooma, Inc.
Notes to Consolidated Financial Statements
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), allocated
costs of facilities and information technology, supplies, software tools and product certification.
Advertising. Advertising costs are included in sales
and
marketing
and
expensed
as
incurred,
except for production costs associated with
television advertising, which are expensed on the first date of airing. Advertising costs were $14.4 million, $16.5 million and $13.9 million for fiscal
2018, 2017 and 2016, respectively.
Advertising payments to the Company’s channel partners are recorded as a reduction in revenue. These costs totaled $0.3 million, $0.3 million and
$0.5 million for fiscal 2018, 2017 and 2016, respectively.
Stock-Based Compensation . 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 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 is
estimated using the Black-Scholes pricing model. See Note 7: Stockholders’
Equity
and Note 8: Stock-based
Compensation
below for additional
information.
Income Taxes. 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 liabilities 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.
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.
Interest and penalties associated with unrecognized tax benefits are classified as income tax expense. The Company had no interest or penalty
accruals associated with uncertain tax benefits in its consolidated balance sheets and statements of operations for any periods presented.
Foreign currency. The U.S. dollar is the functional currency of the Company's foreign subsidiaries. Foreign currency remeasurement and
transaction gains and losses are included in other expense, net and have not been material for any periods presented.
Note 3: Recent Accounting Standards
Adopted Accounting Standards
Going Concern. The Company adopted ASU 2014-15 ,
Disclosure
of
Uncertainties
About
an
Entity’s
Ability
to
Continue
as
a
Going
Concern
in
the first quarter of fiscal 2018. 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 adoption of this standard had no
impact on the Company’s consolidated financial statements.
Stock Compensation. The Company early adopted ASU 2016-09, Stock
Compensation
(Topic
718)
, Scope
of
Modification
Accounting
in the
third quarter of fiscal 2018. The updated standard provides guidance on the changes to the terms or conditions of a share-based payment award that
require an entity to apply modification accounting under Topic 718. The adoption of this standard had no impact on the Company’s consolidated
financial statements.
Ooma Inc. | FY2018 Form 10-K | 64
Ooma, Inc.
Notes to Consolidated Financial Statements
Accounting Standards Not Yet Adopted
Revenue Recognition and Sales Commissions
In May 2014, the FASB issued ASU 2014-09, Revenue
from
Contracts
with
Customers
( Topic
606
), which replaces existing revenue recognition
guidance (Topic 605) with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Topic 606 also
includes Subtopic 340-40, Other
Assets
and
Deferred
Costs
–
Contracts
with
Customers
, which requires the deferral of incremental costs to
acquire customer contracts, including sales commissions. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the “new standard.”
The new standard permits adoption either by using (i) a full retrospective method to restate each prior reporting period presented or (ii) a modified
retrospective method with the cumulative effect of initially applying the new standard recognized at the date of initial application. The Company
adopted the new standard effective February 1, 2018 using the modified retrospective method only with respect to contracts that were not completed
as of February 1, 2018. T he Company’s decision was based on a number of factors such as the significance of the impact of the new standard on
the Company’s financial results, system readiness, and the Company’s ability to accumulate and analyze the information necessary to assess the
cumulative effect of the new standard through February 1, 2018. In preparation for adoption, the Company has implemented additional accounting
reporting processes, transitional internal controls and has reached conclusions on key accounting considerations related to the new standard.
The new standard impacts the way the Company recognizes its product revenue for sales made through its channel partners, whereby revenue will
be recognized upon the sale to the partners (sell-in basis) instead of the Company’s current recognition upon resale by the partners to the end
customers (sell-through basis). Estimates for expected product returns, customer credits and other sales incentives must be made at the time
product is shipped, which will require significant management judgment. As a result of adopting the standard, the fiscal 2019 opening balance of
deferred product revenue associated with shipments made to channel partners is expected to decrease by approximately $1.4 million, with
corresponding adjustments to deferred inventory costs and other related accounts, resulting in a one-time net increase to accumulated deficit of
approximately $0.3 million.
The adoption of the new standard will also change the Company’s treatment of sales commissions. Beginning with the first quarter of fiscal 2019, the
Company will capitalize its incremental commission costs of acquiring customer contracts, which will result in a material increase to the Company’s
assets on the consolidated balance sheet. Previously, sales commissions were expensed as incurred. Deferred commissions will be amortized on a
systematic basis to sales and marketing expense over an estimated customer life of five years, which was calculated based on both qualitative and
quantitative factors, such as product life cycles and customer attrition. As a result of adopting the standard, the fiscal 2019 opening balance of
deferred commissions related to contracts that were not completed as of February 1, 2018 is expected to be immaterial.
The new standard significantly enhances required disclosures regarding revenue, commissions, and related assets and liabilities beginning in the
Company’s Form 10-Q for the period ending April 30, 2018. The adoption of the new standard is not expected to have a significant impact to income
taxes and will have no impact on net cash provided by or used in operating, investing and financing activities in the consolidated statements of cash
flows.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases
(Topic
842)
that 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. Although the Company is currently evaluating the impact this standard will have on its
consolidated financial statements and related disclosures, the Company expects that its operating lease commitments will be subject to the new
standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
Goodwill. 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 expect the adoption of this guidance to have a material impact on its consolidated financial statements, absent
any goodwill impairment.
Ooma Inc. | FY2018 Form 10-K | 65
Ooma, Inc.
Notes to Consolidated Financial Statements
Note 4: Fair Value Measurements
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):
Balance as of January 31, 2018
Balance as of January 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Total
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
Asset-backed securities
Total short-term investments
Liabilities:
Contingent consideration
Total liabilities
$
$
$
$
554 $
—
554 $
— $
2,844
2,844 $
20,867 $
—
—
—
—
20,867 $
— $
13,895
9,272
1,996
1,277
26,440 $
— $
—
— $
$
— $
—
—
—
—
— $
951 $
—
951 $
554 $
2,844
3,398 $
1,085
4,483
— $
—
— $
$
951
—
951
3,039
3,990
20,867 $
13,895
9,272
1,996
1,277
47,307 $
17,798 $
—
—
—
—
17,798 $
18,436
5,386
5,777
1,814
— $ 17,798
18,436
5,386
5,777
1,814
31,413 $ 49,211
$
— $
$
— $
311 $
311 $
311
311
The Company classifies its cash equivalents and short-term investments within Level 1 or Level 2 because it uses quoted market prices or
alternative pricing sources and models utilizing market observable inputs to determine their fair value. The fair value of Level 2 financial instruments
were obtained from an independent pricing service, which used quoted market prices for identical or comparable instruments or model driven
valuations that used observable market data or inputs corroborated by observable market data. Commercial paper was valued using market prices, if
available, adjusted for accretion of the purchase price to face value at maturity. There were no transfers of financial assets or liabilities between
levels during the periods presented .
Gross realized gains and losses related to the Company’s short-term investments were not material for any of the periods presented. Unrealized
losses associated with short-term investments in an unrealized loss position as of January 31, 2018 and 2017 were not material. The Company
determined there were no investments in its portfolio that were other-than-temporarily impaired.
As of January 31, 2018, the Level 3 liabilities consisted of contingent consideration related to the Company’s acquisition of Butterfleye, Inc. in
December 2017 (see Note 12: Acquisitions
and
Divestitures
). The Company estimated the fair value of the contingent consideration using a
probability-weighted discounted cash flow model. Key inputs to the model included assumptions regarding the achievement of certain performance
milestones and discount rates consistent with the level of risk and economy in general. Contingent consideration was classified as a component of
accrued expenses on the consolidated balance sheets. During fiscal 2018, there were no settlements or changes in the fair value of contingent
consideration following the acquisition.
The following table classifies the Company’s short-term investments by contractual maturities (in thousands):
One year or less
Over one year and less than two years
Total
As of January 31, 2018
As of January 31, 2017
Amortized Value
Fair Value
Amortized Value
Fair Value
$
$
43,227 $
4,164
47,391 $
43,172 $
4,135
47,307 $
44,806 $
4,416
49,222 $
44,794
4,417
49,211
Ooma Inc. | FY2018 Form 10-K | 66
Ooma, Inc.
Notes to Consolidated Financial Statements
Note 5: Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $1.9 million and $1.1 million as of January 31, 2018 and 2017, respectively. The Company recognized $1.1
million in intangibles and $0.8 million in goodwill following the acquisition of Butterfleye, Inc. in December 2017. See Note 12: Acquisitions
and
Divestitures
below. There was no change to goodwill subsequent to this acquisition.
The gross value, accumulated amortization and carrying values of intangible assets were as follows (in thousands):
As of January 31, 2018
As of January 31, 2017
Developed technology
Trade name
Patents and licenses
User relationships
Non-compete agreement
Total amortizable assets
In-process R&D
Total intangible assets
$
Estimated
life
(in years)
5
5
3.8-7
3.5
2
$
1,568
262
714
458
—
3,002
Gross
Value
Accumulated
Amortization
Carrying
Value
Gross
Value
$
938
181
16
—
—
1,135
815
103
714
458
118
2,208
(630) $
(81)
(698)
(458)
—
(1,867)
—
(1,867) $
$
$
Accumulated
Amortization
(448)
(56)
(689)
(360)
(118)
(1,671)
Carrying
Value
367
47
25
98
—
537
—
537
N/A
157
3,159 $
$
157
1,292 $
—
2,208 $
—
(1,671) $
Amortization expense was $0.3 million , $0.3 million and $0.4 million in fiscal 2018, 2017 and 2016, respectively. At January 31, 2018, the
estimated future amortization expense for intangible assets is as follows (in thousands):
Fiscal Years Ending January 31,
2019
2020
2021
2022
2023 and thereafter
Total
Note 6: Balance Sheet Components
The following sections and tables provide details of selected balance sheet items (in thousands):
Inventories
Finished goods
Raw material
Total inventory
Deferred revenue
Deferred revenue:
Subscription and services
Product and other
Total deferred revenue
Less: current deferred revenue
Noncurrent deferred revenue included in other long-term liabilities
Ooma Inc. | FY2018 Form 10-K | 67
$
$
372
235
186
182
160
1,135
As of January 31,
2018
2017
5,517 $
562
6,079 $
4,847
983
5,830
As of January 31,
2018
2017
14,568 $
1,416
15,984
15,556
428 $
13,770
2,260
16,030
15,521
509
$
$
$
$
Ooma, Inc.
Notes to Consolidated Financial Statements
Property and equipment, net
Computer equipment and software
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
5
Shorter of estimated life or
remaining lease term
As of January 31,
2018
2017
$
$
$
$
7,180
2,579
1,473
88
651
11,971
(7,239)
4,732
$
$
5,605
1,973
1,304
62
518
9,462
(5,286)
4,176
Depreciation and amortization of property and equipment totaled $2.0 million, $1.6 million and $1.4 million in fiscal 2018, 2017 and 2016,
respectively.
Accrued expenses
Accrued payroll and related expenses
Accrued regulatory fees and taxes
Accrued professional services
Other accrued expenses
Total accrued expenses
Note 7: Stockholders’ Equity
As of January 31,
2018
2017
$
$
5,423 $
5,239
1,046
3,069
14,777 $
4,546
4,315
1,007
1,711
11,579
Initial Public Offering. In July 2015, the Company completed its IPO in which the Company issued and sold 5.0 million shares of its common
stock at a public offering price of $13.00 per share. The net proceeds received by the Company from the IPO were $56.9 million after deducting the
underwriting discounts and commissions.
Convertible Preferred Stock. Upon the closing of the IPO in July 2015, all of the Company's outstanding Series Alpha preferred stock converted
into 7.9 million shares of common stock on a 1:1 basis, all outstanding Series Alpha-1 preferred stock converted into approximately 0.5 million
shares of common stock on a 1:1 basis, and all 0.2 million shares of outstanding Series Beta preferred stock converted into 0.5 million shares of
common stock.
Secondary Offering. In January and March 2017, the Company completed two secondary offerings in which certain stockholders of the Company
sold an aggregate of 3.3 million shares and 3.3 million shares, respectively, of the Company’s common stock at a public offering price of $8.65 per
share and $8.85 per share, respectively, including 0.4 million shares sold upon the underwriters’ exercise of the overallotment option. The Company
did not receive any of the proceeds from this offering.
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. All shares and warrants and per share and warrant amounts set forth herein give effect to this reverse stock split.
Ooma Inc. | FY2018 Form 10-K | 68
Ooma, Inc.
Notes to Consolidated Financial Statements
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 ESPP
Restricted stock units outstanding
Total shares reserved for issuance
2015 Equity Incentive Plan (“2015 Plan”)
As of January 31,
2018
2017
4,881
1,801,232
928,024
598,033
1,966,895
5,299,065
97,931
1,777,365
918,260
532,597
1,859,196
5,185,349
T he Company’s 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 RSUs, non-statutory stock options, stock appreciation rights, restricted stock, 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 approximately 6.6 million.
Employee Stock Purchase Plan
The Company’s 2015 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 may purchase shares at 85% of the lower of the fair market value of the Company’s common stock as of the
first date or the ending date of each six-month offering 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 ended on September 15, 2017. During fiscal 2018 and 2017, employees purchased 0.3 million and 0.2 million
shares, respectively, at a weighted purchase price of $5.48 and $5.01 per share, 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.
Stock option activity for fiscal 2018 was as follows :
Balance as of January 31, 2017
Granted
Exercised
Canceled
Balance as of January 31, 2018
Vested and exercisable - January 31, 2018
Vested and expected to vest - January 31, 2018
Number of
Shares
Weighted Average
Exercise Price
Per Share
Weighted Average
Contractual Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
1,777,365 $
122,750 $
(69,352)
(29,531)
1,801,232 $
1,533,240 $
1,801,232 $
5.74
10.21
4.32
6.03
6.09
5.43
6.09
7.0 $
7,864
6.2 $
6.0 $
6.2 $
8,270
7,926
8,270
The aggregate intrinsic value of vested options exercised during fiscal 2018, 2017 and 2016 was $0.3 million, $1.3 million and $0.8 million,
respectively. The weighted average grant date fair value of options granted during fiscal 2018, 2017 and 2016 was $4.81, zero and $6.92 per share,
respectively. The Company did not grant stock options during fiscal 2017.
Ooma Inc. | FY2018 Form 10-K | 69
Ooma, Inc.
Notes to Consolidated Financial Statements
Restricted Stock Units
RSUs may be granted to employees, non-employee board members and consultants. These RSUs vest ratably over a period ranging 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.
RSU activity for fiscal 2018 and 2017 was as follows :
Balance as of January 31, 2016
Granted
Vested
Canceled
Balance as of January 31, 2017
Granted
Vested
Canceled
Balance as of January 31, 2018
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
1,222,605
(936,869)
(178,037)
1,966,895 $
9.60
7.25
8.76
8.01
7.65
10.17
8.54
8.77
8.85
1.4
$
7,176
1.4
17,941
1.4 $
20,158
Vested RSUs included shares of common stock that the Company withheld on behalf of certain employees to satisfy the minimum statutory tax
withholding requirements, as defined by the Company. The Company withheld an aggregate amount of $2.4 million, $1.6 million and zero in fiscal
2018, 2017 and 2016, respectively, which were classified 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.
Note 8: Stock-Based Compensation
Total stock-based compensation recognized for stock-based awards in the consolidated statements of operations was as follows (in thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expense
2018
Fiscal Year Ended January 31,
2017
2016
$
$
1,102 $
1,818
3,972
4,029
10,921 $
$
1,026
1,438
3,586
3,722
9,772 $
437
611
1,683
1,922
4,653
The income tax benefit related to stock-based compensation expense was zero for all periods presented due to a full valuation allowance on the
Company's net deferred tax assets (see Note 9: Income
Taxes
below). As of January 31, 2018, there was $17.2 million of unrecognized stock-
based compensation expense related to unvested RSUs, stock options and ESPP that will be recognized on a straight-line basis over the remaining
weighted-average vesting period of approximately 3 years.
Fair value disclosures. The fair value of stock options granted and purchased under the Company's ESPP was estimated using the Black-
Scholes option pricing model. The expected term of options granted to employees was based on the simplified method as the Company does not
have sufficient historical exercise data, and the expected term of the ESPP was based on the contractual term. Expected stock price volatility was
estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected
term. Risk-free interest rate was based on the yields of U.S. Treasury securities with maturities similar to the expected term. Dividend yield was zero
as the Company does not have any history of, nor plans to make, dividend payments.
Ooma Inc. | FY2018 Form 10-K | 70
The fair value of employee stock options was estimated using the Black–Scholes model with the following assumptions:
Ooma, Inc.
Notes to Consolidated Financial Statements
Stock Options:
Expected volatility
Expected term (in years)
Risk-free interest rate
Dividend yield
2018
47%
6.1
1.8%-2.1%
—%
Fiscal Year Ended January 31,
2017
N/A
N/A
N/A
—%
2016
54%-62%
5.3-6.1
1.6%-1.9%
—%
The Company did not grant any stock options during fiscal 2017. The 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
Note 9: Income Taxes
2018
Fiscal Year Ended January 31,
2017
2016
35%-41%
0.5-2.0
0.9%-1.4%
—%
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 blended statutory income tax rate of 32.9% to pretax loss as a result
of the following (in thousands):
Federal tax at statutory rate
Impact of U.S. tax law change
Change in valuation allowance
Research and development credit
State taxes
Stock-based compensation
Permanent tax adjustment
Total
Fiscal Year Ended January 31,
2018
Rate
2017
Rate
2016
Rate
$
$
(4,316)
11,667
(6,786)
(1,080)
(396)
387
527
3
33% $
(89)%
52%
8%
3%
(3)%
(4)%
0% $
(4,403)
—
4,881
(738)
(230)
387
103
—
34% $
—
(38)%
6%
2%
(3)%
(1)%
0% $
(4,787)
—
4,502
(273)
(261)
691
128
—
34%
—
(32)%
2%
2%
(5)%
(1)%
0%
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 and rate differential impact from the U.S. Tax Cuts and Jobs Act.
Ooma Inc. | FY2018 Form 10-K | 71
Ooma, Inc.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of the Company’s defe rred 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,
2018
2017
$
$
$
$
$
2,281 $
1,030
61
125
22,047
3,810
29,354
(28,657)
697 $
(313) $
(384)
(697) $
— $
2,623
1,887
101
182
28,120
2,296
35,209
(34,900)
309
(183)
(126)
(309)
—
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law. The Tax Act includes a number of changes in existing tax law
impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21%, effective January 1,
2018. The Company revalued its net deferred tax asset at 21% in the period of enactment. This resulted in a reduction in the value of net deferred
tax assets of approximately $11.4 million, which was offset by the change in valuation allowance, resulting in no impact to the Company's tax
expense. The Company has completed its accounting for certain income tax effects of the Act, as it relates to its current structure, and does not
expect these provisions to have a material effect on the Company’s future results of operations.
The Company has a Section 162(m) stock awards limitation on deferred tax assets of $0.9 million. Effective for tax years beginning on January 1,
2018 or later, which is considered fiscal 2019 for the Company, tax reform legislation modifies Section 162(m) rules to repeal the performance-based
compensation and commission exceptions to the $1 million deduction limitation. However, written binding contracts in effect on November 2, 2017,
including plans where the right to participate in the plan is part of a written contract with an executive, are grandfathered and not subject to limitation
under Section 162(m). The Company believes some of its contracts will not be subject to limitation and will continue to monitor the deferred tax
assets related to deferred compensation expense and share-based compensation expense on a going forward basis.
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 $28.7 million, $34.9 million and
$29.9 million as of January 31, 2018, 2017 and 2016, respectively. The net change in the total valuation allowance for fiscal 2018 and 2017 was a
decrease of $6.2 million and an increase of $5.0 million, respectively.
As of January 31, 2018, the Company had approximately $83.0 million and $62.0 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 $3.7 million and $3.4 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.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to
complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impact related to the
revaluation of deferred tax assets and liabilities to the extent identified. The ultimate impact may differ materially from these provisional amounts due
to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that
may be issued, and actions the Company may take as a result of the Tax Act.
Ooma Inc. | FY2018 Form 10-K | 72
Ooma, Inc.
Notes to Consolidated Financial Statements
Uncertain Tax Positions
The Company has unrecognized tax benefits (“UTBs”) of approximately $2.8 million as of January 31, 2018. Deferred tax assets associated with
these UTBs are fully offset by a valuation allowance. If recognized, these UTBs would not affect the effective tax rate before consideration of the
valuation allowance. The following table summarizes the activity related to UTBs (in thousands):
Balance at January 31, 2016
Increase related to prior year positions
Increase related to current year tax positions
Balance at January 31, 2017
Increase related to prior year positions
Increase related to current year tax positions
Balance at January 31, 2018
$
$
1,217
—
598
1,815
139
871
2,825
The UTBs reported above, if recognized, would not affect the effective tax rate before consideration of the valuation allowance. The Company had
no interest or penalty accruals associated with uncertain tax benefits in its balance sheets and statements of operations for both fiscal 2018 and
2017. 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, 2018. 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 2006
through the current period.
Note 10: Retirement Plan
The Company offers a qualified 401(k) defined contribution plan to eligible full-time employees that provides for discretionary employer matching and
profit-sharing contributions. Eligible 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 first 6% of each employee’s eligible compensation that is contributed to the 401(k) plan. Contributions
made by the Company vest 100% upon contribution. The Company’s matching contributions to the plan, which are expensed immediately as
compensation costs, were $0.5 million, $0.4 million and $0.3 million in fiscal 2018, 2017 and 2016, respectively.
Note 11: Commitments and Contingencies
Leases and Purchase Commitments . The Company’s principal commitments consist of obligations under enforceable and legally binding lease
agreements for office space and data center facilities. Rent expense was $1.9 million, $2.0 million and $1.7 million for fiscal 2018, 2017 and 2016,
respectively. As of January 31, 2018, future minimum rental commitments under non-cancelable operating leases were as follows (in thousands):
Fiscal Year Ending January 31,
2019
2020
2021
2022
2023 and thereafter
Total
Operating
Leases
1,937
1,351
570
191
212
4,261
$
$
In October 2017, the Company entered into an office sublease agreement to lease approximately 33,400 rentable square feet of an office building
located in Sunnyvale, California, the Company’s new corporate headquarters. The term of the sublease agreement expires in November 2019. The
Company also extended the lease term of its facility in Newark, California through February 2023 and entered into a three-year agreement to lease
space from a third-party data center hosting facility in Dallas, Texas. Lease payments associated with these agreements are included in the table
above.
As of January 31, 2018, non-cancelable purchase commitments with the Company’s contract manufacturers were $3.3 million.
Ooma Inc. | FY2018 Form 10-K | 73
Ooma, Inc.
Notes to Consolidated Financial Statements
Legal Proceedings
In addition to the litigation matters described below, from time to time, the Company 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, the Company 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.
The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and
can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using reasonably
available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a
subjective analysis 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 Berks County Litigation, the Company is currently not
a party to any material litigation or other proceedings, and as of January 31, 2018, the Company did not have any material accrued liabilities
recorded for loss contingencies in its consolidated financial statements.
Oregon
Tax
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 the Company is 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, 2017, the DOR filed an answer to the Complaint, and during April 2017, the Company voluntarily participated in an
informal discovery process by providing certain information and documents to the DOR. The Company filed a motion for summary judgment on
September 29, 2017, and on December 13, 2017 the Court heard oral arguments from the parties regarding such motion. 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 the Company will obtain a favorable final
outcome or that it will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to the expense of
its defense and could result in substantial costs and diversion of resources.
Based on the Company’s current knowledge, the Company has 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 estimable.
Ooma Inc. | FY2018 Form 10-K | 74
Ooma, Inc.
Notes to Consolidated Financial Statements
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 Patent”, and such litigation, 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. District Court Judge Jeffrey
S. White of the Northern District of California set the initial case management conference for July 28, 2017. On June 8, 2017, the Company filed a
motion with the United States Patent Trial and Appeal Board for inter parties review of the Deep Green Wireless Patent. Based upon the Company’s
investigation, the Company does not believe that its products infringe any valid or enforceable claim of the aforementioned patent, and the Company
plans to continue vigorously defending against the plaintiff’s claim. However, litigation is unpredictable and there can be no assurances that the
Company will obtain a favorable final outcome or that it will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that
may significantly add to the expense of its defense and could result in substantial costs and diversion of resources.
Based on the Company’s current knowledge, the Company has 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 estimable.
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 the Company, certain of its officers and directors, and certain of the underwriters of our IPO on July 17, 2015. 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 SEC. The consolidated complaint alleges that the Company 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, the Company filed its answer to the complaint, on August 26, 2016 the Company filed a motion for judgment on the pleadings, and
on January 5, 2017, the Superior Court issued an order in response to such motion, granting the Company’s motion to dismiss the claims pursuant
to Sections 12(a)(2) and 15 of the Securities Act, with leave to amend, and denying the Company’s motion to dismiss the claims pursuant to Section
11 of the Securities Act. On August 28, 2017, the plaintiffs filed an amended consolidated complaint, which, among other things, amended the claims
based on Sections 12(a)(2) and 15 of the Securities Act (The “Section 12 and 15 Claims”), and on October 17, 2017, Ooma filed (i) a motion for
judgment on the pleadings with regard to the Section 12 and 15 Claims and (ii) a motion to stay the case pending the United States Supreme Court’s
decision in Cyan
v.
Beaver
Cnty.
Emp.
Ret.‘
Fund
, which takes up the issue of whether the Superior Court has subject matter jurisdiction to hear
claims brought under the Securities Act. On November 29, 2017, the Superior Court dismissed the Section 12 and 15 Claims with prejudice, but
denied the Company’s motions.
On January 11, 2018, Ooma filed a petition for writ of mandate with the California Court of Appeal seeking to overturn the Superior Court’s denial of
the motion to stay, and on February 21, 2018, the writ was denied. On March 20, 2018, the United States Supreme Court published its decision in
the Cyan
case, holding that state courts have subject matter jurisdiction to hear claims brought under the Securities Act, such as the claims alleging
violations of Section 11 of the Securities Act (the only remaining claims in the Securities Litigation) brought against the Company in the Superior
Court.
The Company believes the plaintiffs’ claims are without merit and the Company is vigorously defending against the Securities Litigation and will
continue to do so. However, litigation is unpredictable and there can be no assurances that the Company will obtain a favorable final outcome or that
it will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to the expense of its defense and
could result in substantial costs and diversion of resources.
Based on the Company’s current knowledge, the Company has 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 estimable.
Ooma Inc. | FY2018 Form 10-K | 75
Ooma, Inc.
Notes to Consolidated Financial Statements
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 the Company 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 the Company will obtain a favorable final outcome or that it will be able to avoid unfavorable preliminary or interim rulings in the
course of litigation that may significantly add to the expense of its defense and could result in substantial costs and diversion of resources.
Based on the Company’s current knowledge, the Company has determined that the amount of any material loss or range of any losses that is
reasonably possible to result from the Berks County Litigation is not estimable.
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 any third party with respect to the Company’s technology.
The term of these indemnification agreements is generally perpetual. The maximum potential amount of fu ture payments the Company could be
required to make under these agreements is not determinable because 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.
Note 12: Acquisitions and Divestitures
Acquisition of Butterfleye, Inc.
On December 14, 2017, the Company completed its acquisition of Butterfleye, Inc., a privately-held company that offers intelligent, wire-free security
cameras. The fair value of consideration transferred included $1.5 million cash as well as deferred earnout payments contingent upon the
achievement of certain performance targets during the Company’s fiscal 2019. The fair market value and gross amount of the earn-out payments
were approximately $0.3 million and $0.9 million, respectively (see Note 4: Fair
Value
Measurements
above for additional information regarding fair
value).
The final purchase price allocation included identifiable intangible assets of approximately $1.1 million, net liabilities assumed of approximately $0.1
million and residual goodwill of approximately $0.8 million, based on the best estimates of management. See Note 5: Goodwill
and
Acquired
Intangible
Assets
above. Acquisition-related transaction costs charged to expense were not material. The goodwill recognized was attributable
primarily to expected synergies in the acquired technologies that may be leveraged by the Company in future home security product offerings.
Goodwill is not expected to be deductible for U.S. income tax purposes.
The operating results of the acquired company have been included in the Company's consolidated financial statements from the date of acquisition.
Actual and pro forma results of operations for the Butterfleye acquisition have not been presented because it does not have a material impact on the
Company's consolidated results of operations.
Ooma Inc. | FY2018 Form 10-K | 76
Ooma, Inc.
Notes to Consolidated Financial Statements
Sale of Business Promoter
On August 15, 2017, the Company completed the sale of its Business Promoter service to Xedia Networks, Inc. The Company did not receive any
cash proceeds nor did it recognize any losses or gains from this transaction. The Company is entitled to receive a quarterly earn-out for the next five
years up to a maximum of $4.5 million, subject to certain quarterly thresholds. Through January 31, 2018, the Company recorded earn-outs of
approximately $0.2 million as a reduction to general and administrative expense in its consolidated statement of operations.
Note 13: 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 because the effects of potentially dilutive securities are antidilutive because the Company reported net losses for all periods presented.
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):
Numerator
Net loss
Denominator
Weighted-average common shares
Basic and diluted net loss per share
2018
Fiscal Year Ended January 31,
2017
2016
$
(13,121) $
(12,949) $
(14,052)
18,570,128
17,490,448
$
(0.71) $
(0.74) $
10,173,095
(1.38)
Potentially dilutive securities of approximately 4.1 million, 4.1 million and 3.8 million were excluded from the computation of diluted net loss per share
for fiscal 2018, 2017 and 2016, respectively, and included the Company’s RSUs, stock options and shares to be purchased under the ESPP.
Note 14: Related Party Transactions
Beginning fiscal 2017, one of the members of the Company’s board of directors has been affiliated with a professional firm that provided public
relations services to the Company. The Company incurred expenses of approximately $0.2 million and $0.3 million in fiscal 2018 and 2017,
respectively, for the services provided by the firm.
In October 2017, the Company entered into an office sublease agreement with Fiserv Solutions, LLC (“Fiserv”) to lease approximately 33,400
rentable square feet of an office building located in Sunnyvale, California , the Company’s new corporate headquarters. One of the members of the
Company’s board of directors is also a current member of Fiserv’s board of directors. The Company incurred rent expense of approximately $0.2
million in fiscal 2018 under this sublease agreement.
Note 15: Subsequent Events
On March 2, 2018, the Company entered into a definitive agreement to acquire Voxter Communications Inc., a privately-held provider of UCaaS
solutions for mid-market and enterprise businesses. The aggregate purchase price consisted of cash and equity consideration of approximately $3.6
million and deferred earnout payments contingent upon the achievement of certain business milestones. The transaction closed on March 12, 2018
and the Company is determining the fair value of assets acquired and liabilities assumed necessary to develop the purchase price allocation.
Ooma Inc. | FY2018 Form 10-K | 77
ITEM 9. Changes in and Disagreements with Accountants 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, 2018. 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, 2018, 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, 2018 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,
2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
Ooma Inc. | 2018 Form 10-K | 78
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 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended January 31, 2018, which we
refer to as our 2018 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 2018 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 2018 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 2018 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 2018 Proxy Statement and is incorporated herein by reference.
Ooma Inc. | 2018 Form 10-K | 79
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” 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 below. 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).
Ooma Inc. | 2018 Form 10-K | 80
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
agreement thereunder.
10.4+
Executive Incentive Bonus Plan.
10.5+
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.
10.8
Change in Control Letter Agreement between the
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-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-K
S-1
Ooma Inc. | FY2018 Form 10-K | 81
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
10.8
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
4/11/2017
6/15/2015
Exhibit Number
Description
Filed / Furnished /
Incorporated by
Reference from Form
Incorporated by
Reference from Exhibit
Number
Date Filed
10.10
Sublease Agreement, dated as of September 12, 2017
by and among the Company and Fiserv Solutions, LLC.
8-K
10.1
10/10/2017
21.1
23.1
31.1
31.2
32.1
32.2
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 Chief
Financial Officer.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
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.
Furnished herewith.
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by Chief Financial Officer.
Furnished herewith.
101.INS
XBRL Instance Document
Filed herewith.
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith.
101.CAL
101.DEF
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
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.
Ooma Inc. | FY2018 Form 10-K | 82
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 .
March 30, 2018
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 Galligan
Andrew Galligan
/s/ Peter J. Goettner
Peter J. Goettner
/s/ Russell Mann
Russell Mann
/s/ William D. Pearce
William D. Pearce
Title
Date
President and Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Director
March 30, 2018
March 30, 2018
March 30, 2018
March 30, 2018
March 30, 2018
March 30, 2018
March 30, 2018
Lead Director
March 30, 2018
Ooma Inc. | FY2018 Form 10-K | 83
List of Subsidiaries
Name
Jurisdiction of Incorporation
Talkatone, LLC
Ooma International Operations, LLC
Ooma International Ltd.
Ooma Australia Pty Ltd.
Butterfleye, Inc.
Delaware
Delaware
United Kingdom
Australia
Delaware
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-217254, 333-210717, 333-205719 on Form S-8, and in
Registration Statement No. 333-215155 on Form S-3, of our report dated March 30, 2018, relating to the consolidated financial statements of Ooma,
Inc. and subsidiaries (the “Company”) appearing in this Annual Report on Form 10-K of the Company for the year ended January 31, 2018.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 30, 2018
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.
I have reviewed this Annual Report on Form 10-K of Ooma, Inc. for the fiscal year ended January 31, 2018;
2. 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;
3. 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;
4. 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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.
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: March 30, 2018
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.
I have reviewed this Annual Report on Form 10-K of Ooma, Inc. for the fiscal year ended January 31, 2018;
2. 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;
3. 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;
4. 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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.
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: March 30, 2018
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, 2018, 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: March 30, 2018
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, 2018, 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: March 30, 2018
By:
/s/ Ravi Narula
Ravi Narula
Chief Financial Officer and Treasurer