Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
Commission file number: 001-35264
 
CARBONITE, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
33-1111329
(State or other jurisdiction of
incorporation)
(I.R.S. Employer
Identification No.)
Two Avenue de Lafayette, Boston, Massachusetts 02111
(Address of principal executive offices, including ZIP code)
(617) 587-1100
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨

Non-accelerated filer
o
Smaller reporting company
¨
Emerging growth company
o
 
 
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  ý


Table of Contents

Securities Registered Pursuant to Section 12(b) of the Act:
 
 
 
 
 
Common Stock, par value $0.01 per share
 
CARB
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Trading symbol)
 
(Name of each exchange on which registered)
As of April 30, 2019, there were 34,446,921 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 


Table of Contents

CARBONITE, INC.
Table of Contents

 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


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PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Carbonite, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
March 31, 2019
 
December 31, 2018
 
(in thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
252,602

 
$
198,087

Trade accounts receivable, less allowances for doubtful accounts of $947 and $892
50,501

 
31,569

Prepaid expenses and other current assets
30,742

 
10,409

Total current assets
333,845

 
240,065

Property and equipment, net
45,446

 
34,101

Right-of-use lease assets
55,204

 

Other assets
26,273

 
13,876

Acquired intangible assets, net
430,297

 
117,963

Goodwill
541,230

 
155,086

Total assets
$
1,432,295

 
$
561,091

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,942

 
$
2,114

Accrued compensation
21,776

 
11,620

Accrued expenses and other current liabilities
47,583

 
15,844

Purchase price consideration payable
132,369

 

Current portion of deferred revenue
172,432

 
121,553

Total current liabilities
379,102

 
151,131

Long-term debt
645,371

 
118,305

Long-term lease liabilities
51,798

 

Deferred revenue, net of current portion
42,418

 
29,151

Long-term deferred tax liabilities
46,335

 
1,456

Other long-term liabilities
4,088

 
3,838

Total liabilities
1,169,112

 
303,881

Commitments and contingencies (Note 13)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 6,000,000 shares authorized; no shares issued

 

Common stock, $0.01 par value; 45,000,000 shares authorized; 37,173,458 shares issued and 34,425,777 shares outstanding at March 31, 2019; 36,641,317 shares issued and 33,923,135 shares outstanding at December 31, 2018
372

 
366

Additional paid-in capital
455,971

 
451,618

Treasury stock, at cost (2,747,681 and 2,718,182 shares as of March 31, 2019 and December 31, 2018, respectively)
(49,276
)
 
(48,522
)
Accumulated other comprehensive income
2,015

 
1,650

Accumulated deficit
(145,899
)
 
(147,902
)
Total stockholders’ equity
263,183

 
257,210

Total liabilities and stockholders’ equity
$
1,432,295

 
$
561,091

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Carbonite, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except share and per share amounts)
Revenue:


 


Services
$
71,503

 
$
54,574

Product
9,712

 
9,452

Total revenue
81,215

 
64,026

Cost of revenue:
 
 
 
Services
17,102

 
15,330

Product
383

 
557

Amortization of intangible assets
3,294

 
2,425

Total cost of revenue
20,779

 
18,312

Gross profit
60,436

 
45,714

Operating expenses:
 
 
 
Research and development
15,807

 
12,519

General and administrative
20,989

 
14,460

Sales and marketing
21,765

 
19,860

Amortization of intangible assets
4,300

 
939

Restructuring charges

 
862

Total operating expenses
62,861

 
48,640

Loss from operations
(2,425
)
 
(2,926
)
Interest expense
(4,011
)
 
(2,601
)
Interest income
965

 
244

Other income (expense), net
212

 
12

Loss before income taxes
(5,259
)
 
(5,271
)
Benefit for income taxes
(7,262
)
 
(17,215
)
Net income
$
2,003

 
$
11,944

Net income per common share:
 
 
 
Basic
$
0.06

 
$
0.42

Diluted
$
0.06

 
$
0.40

Weighted-average number of common shares outstanding:
 
 
 
Basic
34,164,957

 
28,341,663

Diluted
35,294,015

 
30,043,783

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Carbonite, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Net income
$
2,003

 
$
11,944

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
365

 
(639
)
Total other comprehensive income (loss)
365

 
(639
)
Total comprehensive income
$
2,368

 
$
11,305

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Carbonite, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
in thousands, except share data
Number of
Shares
 
Amount
 
Balance as of December 31, 2018
36,641,317

 
$
366

 
$
451,618

 
$
(147,902
)
 
$
(48,522
)
 
$
1,650

 
$
257,210

Stock options exercised and vesting of restricted stock units
532,141

 
6

 
130

 
 
 
 
 
 
 
136

Stock-based compensation expense
 
 
 
 
4,223

 
 
 
 
 
 
 
4,223

Payments of withholding taxes in connection with restricted stock unit vesting
 
 
 
 
 
 
 
 
(754
)
 
 
 
(754
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
365

 
365

Net income
 
 
 
 
 
 
2,003

 
 
 
 
 
2,003

Balance as of March 31, 2019
37,173,458

 
$
372

 
$
455,971

 
$
(145,899
)
 
$
(49,276
)
 
$
2,015

 
$
263,183


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
in thousands, except share data
Number of
Shares
 
Amount
 
Balance as of December 31, 2017
30,130,856

 
$
301

 
$
233,343

 
$
(169,344
)
 
$
(26,616
)
 
$
581

 
$
38,265

Stock options exercised and vesting of restricted stock units
408,764

 
4

 
722

 
 
 
 
 
 
 
726

Stock-based compensation expense
 
 
 
 
3,818

 
 
 
 
 
 
 
3,818

Payments of withholding taxes in connection with restricted stock unit vesting
 
 
 
 
 
 
 
 
(550
)
 
 
 
(550
)
Adjustment resulting from the adoption of Topic 606
 
 
 
 
 
 
13,880

 
 
 
 
 
13,880

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
(639
)
 
(639
)
Net income
 
 
 
 
 
 
11,944

 
 
 
 
 
11,944

Balance as of March 31, 2018
30,539,620

 
$
305

 
$
237,883

 
$
(143,520
)
 
$
(27,166
)
 
$
(58
)
 
$
67,444


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Carbonite, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Operating activities
 
 
 
Net income
$
2,003

 
$
11,944

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,149

 
6,077

Amortization of right-of-use assets
1,291

 

Amortization of deferred costs
647

 
424

(Gain) loss on disposal of equipment
(36
)
 
58

Impairment of capitalized software

 
653

Stock-based compensation expense
4,205

 
3,737

Benefit for deferred income taxes
(7,318
)
 
(17,662
)
Non-cash interest expense related to amortization of debt discount
1,712

 
1,543

Other non-cash items, net
1

 
66

Changes in assets and liabilities:
 
 
 
Accounts receivable
(356
)
 
(4,616
)
Prepaid expenses and other current assets
(5,430
)
 
86

Other assets
123

 
(2,211
)
Accounts payable
(870
)
 
(4,214
)
Accrued expenses and other current liabilities
7,349

 
3,016

Other long-term liabilities
(1,388
)
 
252

Deferred revenue
5,662

 
4,138

Net cash provided by operating activities
18,744

 
3,291

Investing activities
 
 
 
Purchases of property and equipment
(2,758
)
 
(3,288
)
Proceeds from sale of property and equipment and businesses
51

 
330

Proceeds from maturities of derivatives
6

 

Purchases of derivatives
(6
)
 
(1,403
)
Payment for intangibles

 
(1,250
)
Payment for acquisition, net of cash acquired
(489,640
)
 
(144,603
)
Net cash used in investing activities
(492,347
)
 
(150,214
)
Financing activities
 
 
 
Proceeds from exercise of stock options
130

 
726

Payments of withholding taxes in connection with restricted stock unit vesting
(754
)
 
(550
)
Proceeds from long-term borrowings, net of debt issuance costs
531,893

 
88,984

Net cash provided by financing activities
531,269

 
89,160

Effect of currency exchange rate changes on cash
(463
)
 
541

Net increase (decrease) in cash, cash equivalents and restricted cash
57,203

 
(57,222
)
Cash, cash equivalents and restricted cash, beginning of period
198,087

 
128,231

Cash, cash equivalents and restricted cash, end of period
$
255,290

 
$
71,009


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.






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Carbonite, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Supplemental disclosure of cash flow information
 
 
 
Cash paid for income taxes
$
184

 
$
341

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capitalization of stock-based compensation
$
18

 
$
81

Acquisition of property and equipment included in accounts payable and accrued expenses
$
10

 
$
2,751


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Carbonite, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Business
Carbonite, Inc. ("we" or the “Company”) is a leading provider of cloud-based data protection and cybersecurity solutions. The Company was incorporated in the State of Delaware on February 10, 2005. We provide a robust data protection platform for businesses, including backup, disaster recovery, high availability and workload migration technology. The Carbonite data protection platform supports businesses on a global scale with secure cloud infrastructure.
In March 2019, Carbonite acquired Webroot Inc. ("Webroot"), a next-generation cloud-based security and threat intelligence provider for consumers and businesses. Webroot is a leading security provider for managed service providers to protect small businesses, who rely on Webroot for endpoint protection, network protection, and security awareness training.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q, and the provisions of Regulation S-X pertaining to interim financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on February 28, 2019.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented. The results for the periods presented are not necessarily indicative of future results.
Reclassification
The Company has reclassified certain prior period amounts in its condensed consolidated balance sheets to conform to the current period presentation. The reclassification relates to separately presenting long-term deferred tax liabilities previously included within other long-term liabilities. For the year ended December 31, 2018, the Company reclassified $1.5 million from other long-term liabilities into long-term deferred tax liabilities.
Recently Adopted Accounting Standards
The Company's significant accounting policies are presented in Note 2 - Summary of Significant Accounting Policies, in the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2018 filed with the SEC on February 28, 2019. Summarized below are the accounting pronouncements adopted subsequent to December 31, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by leases and continue to recognize expenses on their income statements over the lease term. It also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this standard effective January 1, 2019 using the modified retrospective transition method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of transition practical expedients for existing contracts. Adoption of the new standard resulted in the recording of right-of-use assets of $22.6 million and lease liabilities of $28.8 million, as of January 1, 2019. The difference between the right-of-use assets and lease liabilities relates to deferred and prepaid rent balances, the net impact of which reduced the right-of-use assets. The adoption of the standard did not impact the Company's consolidated net earnings and had no impact on cash flows. Refer to Note 12 - Leases for additional information related to the Company’s lease obligations.
Recently Issued Accounting Standards

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In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
3. Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The Company primarily sells services in the form of “Software-as-a-Service” ("SaaS") and "Hardware-as-a-Service" ("HaaS") offerings as well as maintenance and support ("M&S") and professional services consisting of implementation, training, migration, protection and consulting. The Company also sells products in the form of on-premise data protection and migration software and hardware on a standalone basis. Revenues related to services are recorded over the performance period of the service. Revenues from product licenses and hardware sales are recorded when control of the product has been transferred to the customer.
Disaggregation of Revenue
The following table depicts disaggregated revenue for the three months ended March 31, 2019 and 2018, by type, customer type, sales channel, timing of revenue recognition, and geography (in thousands):
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Products
 
Services
 
Total
 
Products
 
Services
 
Total
Customer type
 
 
 
 
 
 
 
 
 
 

Consumer
$

 
$
27,332

 
$
27,332

 
$

 
$
20,943

 
$
20,943

Business
9,712

 
44,171

 
53,883

 
9,452

 
33,631

 
43,083

Total
$
9,712

 
$
71,503

 
$
81,215

 
$
9,452

 
$
54,574

 
$
64,026

 
 
 
 
 
 
 
 
 
 
 

Sales channel
 
 
 
 
 
 
 
 
 
 

Direct
$
1,966

 
$
48,593

 
$
50,559

 
$
1,043

 
$
37,881

 
$
38,924

Indirect
7,746

 
22,910

 
30,656

 
8,409

 
16,693

 
25,102

Total
$
9,712

 
$
71,503

 
$
81,215

 
$
9,452

 
$
54,574

 
$
64,026

 
 
 
 
 
 
 
 
 
 
 
 
Timing of revenue recognition
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point in time
$
9,712

 
$

 
$
9,712

 
$
9,452

 
$

 
$
9,452

Transferred over time

 
71,503

 
71,503

 

 
54,574

 
54,574

Total
$
9,712

 
$
71,503

 
$
81,215

 
$
9,452

 
$
54,574

 
$
64,026

 
 
 
 
 
 
 
 
 
 
 
 
Geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
3,081

 
$
63,746

 
$
66,827

 
$
4,650

 
$
48,997

 
$
53,647

Other
6,631

 
7,757

 
14,388

 
4,802

 
5,577

 
10,379

Total
$
9,712

 
$
71,503

 
$
81,215

 
$
9,452

 
$
54,574

 
$
64,026

Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable once the rights become unconditional. As of March 31, 2019 and December 31, 2018, the Company did not have contract assets.
Contract liabilities (deferred revenue) primarily consist of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis. The Company initially records fees associated with performance obligations delivered over time as deferred revenue and then recognizes revenue as performance obligations are satisfied. The Company classifies deferred revenue as current or noncurrent based on the timing revenue recognition. Changes in contract liabilities for the three months ended March 31, 2019 are as follows (in thousands):

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Deferred Revenue (Current)
 
Deferred Revenue (Noncurrent)
Balance as of December 31, 2018
$
121,553

 
$
29,151

Increase, net
50,879

 
13,267

Balance as of March 31, 2019
$
172,432

 
$
42,418

Revenue recognized in the three months ended March 31, 2019 that was related to deferred revenue at December 31, 2018 was approximately $48.7 million. For the three months ended March 31, 2019, the Company recognized $2.0 million of revenue from deferred revenue related to the acquisition of Webroot on March 26, 2019.
On March 31, 2019, the Company had $263.1 million of remaining performance obligations. This amount does not include any variable consideration for sales or usage-based royalties. The Company expects to recognize 72.0% of its remaining performance obligations as revenue in the year ended December 31, 2019, an additional 21.0% for the year ended December 31, 2020 and the remaining balance thereafter.
Accounts Receivable, Net 
Accounts receivable, net, are amounts due from customers where there is an unconditional right to consideration. Unbilled receivables of $8.8 million and $3.9 million are included in this balance at March 31, 2019 and December 31, 2018, respectively. The payment of consideration related to these unbilled receivables is conditioned only on the passage of time.
4. Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. For the periods in which the Company incurs a net loss, the effect of the Company's outstanding common stock equivalents is not included in the calculation of diluted loss per share as they would be anti-dilutive. The following table sets forth the computation of basic and diluted net income per share:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
      Net income
$
2,003

 
$
11,944

Denominator:
 
 
 
      Weighted average common shares outstanding, basic
34,165

 
28,342

      Effect of potential dilutive common shares
1,129

 
1,702

Weighted average shares outstanding, diluted
35,294

 
30,044

Basic net income per share
$
0.06

 
$
0.42

Diluted net income per share
$
0.06

 
$
0.40

The Company has the ability and intent to settle the principal of the convertible senior notes (the "Convertible Notes"), issued in April 2017, in cash. As the Company's common stock price exceeded the $25.84 conversion price during the three months ended March 31, 2018, the Company has included the dilutive effect of shares in excess of the principal amount in the calculation of diluted net income per share as of March 31, 2018, using the treasury stock method. The Company's stock price did not exceed the conversion price during the three months ended March 31, 2019, therefore the impact of the Convertible Notes was excluded from the calculation of diluted net income per share.
The following options to purchase common shares, restricted stock units/awards and shares of common stock purchasable under the Company’s 2017 Employee Stock Purchase Plan (“2017 ESPP”) have been excluded from the computation of diluted net income per share because they had an anti-dilutive impact, or because they related to share-based awards that were contingently issuable, for which the applicable vesting conditions had not been satisfied (in thousands):

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Three Months Ended March 31,
 
2019
 
2018
Options to purchase common shares1
3

 

Restricted stock units/awards
206

 
188

Total
209

 
188

 
 
 
 
(1) This balance includes shares purchasable under the Company's 2017 ESPP which were determined to be anti-dilutive.
5. Fair Value of Financial Instruments
Derivative Instruments
Non-designated Foreign Currency Contracts
The Company uses foreign currency forward contracts as part of its strategy to manage exposure related to Euro denominated intercompany monetary assets and liabilities. The Company has not designated these forward contracts as hedging instruments. Accordingly, the Company recorded the fair value of these contracts at the end of each reporting period in the condensed consolidated balance sheets, with changes in the fair value recorded in earnings as other income (expense), net in the condensed consolidated statements of operations. Cash flows from the settlement of these non-designated foreign currency contracts are reported in cash flows from investing activities. These currency forward contracts are entered into for periods consistent with currency transaction exposures, generally less than one year. At March 31, 2019 and December 31, 2018, the Company had outstanding contracts with a total notional value of $44.6 million and $43.8 million, respectively.
The following table provides a quantitative summary of the fair value of derivative instruments not designated as hedging instruments as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
Fair Value
Description
Balance Sheet Classification
 
March 31, 2019
 
December 31, 2018
Derivative assets:
 
 
 
 
 
Non-designated hedging instruments
 
 
 
 
 
Foreign currency contracts
Prepaid expenses and other current assets
 
$
930

 
$

Total derivative assets
 
 
$
930

 
$

 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Non-designated hedging instruments
 
 
 
 
 
Foreign currency contracts
Accrued expenses and other current liabilities
 
$

 
$
195

Total derivative liabilities
 
 
$

 
$
195

The following table summarizes the gains (losses) related to derivative instruments not designated as hedging instruments for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
Three Months Ended March 31,
Description
Location in Statement of Operations
 
2019
 
2018
Foreign currency contracts
Other income (expense), net
 
$
1,125

 
$
(1,071
)
Other Fair Value Measurements and Disclosures
The Company applies the guidance in ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”), which provides that fair value is based on 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 measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

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Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible in its assessment of fair value.
The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy are summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents - money market funds
$
200,163

 
$

 
$

 
$
200,163

 
$
156,200

 
$

 
$

 
$
156,200

Foreign currency exchange contracts

 
930

 

 
930

 

 

 

 

Total
$
200,163

 
$
930

 
$

 
$
201,093

 
$
156,200

 
$

 
$

 
$
156,200

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts

 

 

 
$

 

 
195

 

 
$
195

Total
$

 
$

 
$

 
$

 
$

 
$
195

 
$

 
$
195

The Company’s investments in money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company's foreign currency exchange contracts are classified as Level 2 within the fair value hierarchy as they are valued using professional pricing sources for identical or comparable instruments, rather than direct observations of quoted prices in active markets. No assets or liabilities are classified as Level 3 within the fair value hierarchy.
The Company estimates the fair value of its Convertible Notes and Term Loans using quoted market prices in inactive markets on the last trading day of the reporting period. The Convertible Notes and Term Loans have been classified as Level 2 within the fair value hierarchy. The principal amount, carrying value (the carrying value of the Convertible Notes excludes the equity component) and related estimated fair value of the Company's Convertible Notes and Term Loans reported in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018 are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Principal
 
Carrying Value
 
Fair Value
 
Principal
 
Carrying Value
 
Fair Value
Convertible notes
$
143,750

 
$
120,025

 
$
167,006

 
$
143,750

 
$
118,305

 
$
168,287

Term loans
$
550,000

 
$
530,825

 
$
549,313

 
$

 
$

 
$

The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value because of their short maturities.
Non-Recurring Fair Value Measures
Certain non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets. Such fair value measures are considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. During the three months ended March 31, 2018, the Company recorded an impairment charge of $0.7 million related to internally developed software costs which were no longer recoverable as the project was discontinued. The Company recorded the impairment charge in the cost of revenue, research and development, sales and marketing, and general and administrative captions in the condensed consolidated statements of operations. There were no impairment charges during the three months ended March 31, 2019.
6. Acquisitions

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Acquisition-Related Expenses
In the three months ended March 31, 2019 and 2018, acquisition-related expenses were $9.5 million and $3.3 million, respectively. Acquisition-related expenses have been included primarily in general and administrative expenses in the condensed consolidated statements of operations. The Company's current year acquisition costs relate to the acquisition of Webroot and the prior year acquisition costs relate to the acquisition of Mozy.
2019 Acquisition
On February 7, 2019, the Company entered into an agreement and plan of merger (the "Agreement") to acquire Webroot. Pursuant to the Agreement, on March 26, 2019, the Company completed the acquisition of all of the issued and outstanding capital stock of Webroot, a next-generation online and cloud-based security and threat intelligence provider for consumers and businesses, for a purchase price of $622.0 million in cash, net of cash acquired. The purchase price was funded with cash on hand and funds secured under a new credit facility (refer to Note 15 - Borrowings and Credit Arrangements). The acquisition of Webroot has been accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
The purchase price allocation is considered preliminary, and additional adjustments may be recorded during the measurement period in accordance with FASB’s guidance regarding business combinations. The purchase price allocation will be finalized as the Company receives additional information relevant to the acquisition, including the final valuation and reconciliation of the assets purchased, including tangible and intangible assets, liabilities assumed, and the related impact to the deferred tax assets and liabilities. The following tables summarize the preliminary purchase price allocation (in thousands):
                
Fair value of consideration transferred:
 
Cash, net of cash acquired
$
489,640

Purchase price consideration liability
132,369

Fair value of total acquisition consideration
$
622,009

                                                
Fair value of assets acquired and liabilities assumed:
 
Accounts receivable
$
18,783

Prepaid and other current assets
13,501

Property and equipment
11,613

Right-of-use lease assets
33,476

Other assets
8,934

Intangible assets
320,152

Goodwill
386,413

Total assets acquired
792,872

Accounts payable
(3,496
)
Accrued liabilities
(18,950
)
Deferred revenues
(58,783
)
Long-term lease liabilities
(33,476
)
Deferred tax liability
(56,158
)
Net assets acquired
$
622,009

The Company engaged a third-party valuation firm to assist in the valuation of intangible assets consisting of customer relationships, developed technology and internal-use technology, and the Webroot trade name as well as in the valuation of deferred revenue and property and equipment. The fair values of the remaining Webroot assets and liabilities noted above approximate their carrying values at March 26, 2019.
In connection with the acquisition of Webroot, goodwill of $386.4 million was recognized for the excess purchase price over the fair value of the net assets acquired. The Company believes the goodwill related to the acquisition will enable the Company to leverage its technology in the broader market, as well as offering cross-selling market exposure opportunities. Goodwill from the acquisition of Webroot is included within the Company’s one reporting unit and will be included in the annual review for impairment. Goodwill is not deductible for tax purposes as this acquisition was a stock purchase.

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The significant intangible assets identified in the purchase price allocation discussed above include developed technology, customer relationships, trade names, and internal-use technology which are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. Customer relationships represent the underlying relationships with certain customers to provide ongoing services for products sold. To value the customer relationship asset, the Company utilized the income approach, specifically a discounted cash-flow method known as the excess earnings method. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names. The developed technology and trade name intangibles were valued using a relief from royalty method, which considers both the market approach and the income approach. Internal-use technology consists of developed tools used internally to assist the Company in generating revenue. The internal-use technology was valued using the replacement cost approach. The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired and risk-adjusted discount rates used in the valuation:
 
Amount
(in thousands)
 
Weighted Average Useful Life
(in years)
 
Risk-Adjusted Discount Rates used in Valuation1
Developed technology
$
128,000

 
6.8
 
14.0%
Customer relationships
170,000

 
10.7
 
15.0% - 17.5%
Trade names
18,400

 
4.0
 
14.0%
Internal-use technology
3,752

 
2.0
 
17.5%
Total identifiable intangible assets
$
320,152

 
 
 
 
 
 
 
 
 
 
(1) Note that acquired internal-use technology was valued using the replacement cost approach which uses an estimated market return rate as opposed to a risk-adjusted discount rate.
For the three months ended March 31, 2019, the operating results of Webroot, which are included in the Company's condensed consolidated statements of operations since the date of acquisition, are comprised of $2.7 million of revenue and $3.1 million of expenses, excluding amortization expense.
Pro Forma Financial Information
The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Webroot for the three month periods ended March 31, 2019 and 2018 as if the acquisition of Webroot had been completed on January 1, 2018. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fair value of acquired intangible assets, fair value adjustment for deferred revenue, additional annual interest expense resulting from interest on the Company's new credit facility (as further described in Note 15 - Borrowings and Credit Arrangements) to finance the acquisition of Webroot, reversal of depreciation expense resulting from the application of fair value measurement to acquired property and equipment, adjustments for contract costs in connection with the adoption of Topic 606, and adjustments relating to the tax effect of combining the Carbonite and Webroot businesses.
The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and Webroot. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2018, nor are they intended to represent or be indicative of future results of operations (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Pro forma revenue
$
137,106

 
$
105,561

Pro forma net income (loss)
$
3,654

 
$
(3,882
)
Pro forma net income (loss) per common share:
 
 
 
Basic
$
0.11

 
$
(0.14
)
Diluted
$
0.10

 
$
(0.14
)
2018 Acquisition
On February 12, 2018, the Company entered into a definitive Master Acquisition Agreement ("the Mozy Agreement") with EMC Corporation (“EMC”), Mozy and Dell Technologies, Inc. Pursuant to the Mozy Agreement, on March 19, 2018, the

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Company completed the acquisition of all of the issued and outstanding capital stock of Mozy, a cloud backup service for consumers and businesses, and certain related business assets owned by EMC or its affiliates, for a purchase price of $144.6 million in cash, net of cash acquired. The purchase price was funded with cash on hand and funds available under the Company’s previous revolving credit facility that has since been repaid and terminated. In connection with the acquisition of Mozy, the Company negotiated a transition services agreement to cover certain consulting, technology and engineering services for up to eighteen months post close. The acquisition of Mozy has been accounted for as a business combination and the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
The following table summarizes the final purchase price allocation (in thousands):
Fair value of consideration transferred:
 
Cash, net of cash acquired
$
144,597

Fair value of total acquisition consideration
$
144,597

Fair value of assets acquired and liabilities assumed:
 
Accounts receivable
$
1,629

Prepaid and other current assets
872

Property and equipment
7,169

Other assets
242

Intangible assets
96,400

Goodwill
74,753

Total assets acquired
181,065

Accounts payable
(141
)
Accrued liabilities
(417
)
Deferred revenues
(19,740
)
Deferred tax liability
(16,170
)
Net assets acquired
$
144,597

The Company engaged a third-party valuation firm to assist in the valuation of intangible assets consisting of customer relationships, developed technology and the Mozy trade name as well as in the valuation of deferred revenue and property and equipment. The fair values of the remaining Mozy assets and liabilities noted above approximate their carrying values at March 19, 2018.
The Company believes the goodwill related to the acquisition was a result of the ability of the Company to leverage its technology in the broader market, as well as offering cross-selling market exposure opportunities. Goodwill from the acquisition of Mozy is included within the Company’s one reporting unit and will be included in the annual review for impairment. Goodwill is not deductible for tax purposes as this acquisition was a stock purchase.
The significant intangible assets identified in the purchase price allocation discussed above include customer relationships, developed technology, and trade names which are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. Customer relationships represent the underlying relationships with certain customers to provide ongoing services for products sold. To value the customer relationship asset, the Company utilized the income approach, specifically a discounted cash-flow method known as the excess earnings method. Developed technology consists of products that have reached technological feasibility and trade names represent acquired company and product names. The developed technology intangible was valued using a relief from royalty method, which considers both the market approach and the income approach. The trade name intangible was valued using the replacement cost/lost profits methodology. The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired and risk-adjusted discount rates used in the valuation:

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Table of Contents

 
Amount
(in thousands)
 
Weighted Average Useful Life
(in years)
 
Risk-Adjusted Discount Rates used in Valuation
Developed technology
$
8,700

 
2.0
 
12.5%
Customer relationships
87,200

 
7.0
 
16.5 - 17.5%
Trade names
500

 
2.0
 
12.5%
Total identifiable intangible assets
$
96,400

 
 
 
 
Pro Forma Financial Information
The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Mozy for the three month period ended March 31, 2018 as if the acquisition of Mozy had been completed on January 1, 2018. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fair value of acquired intangible assets, fair value adjustment for deferred revenue, additional annual interest expense resulting from interest on the previous revolving credit facility to finance the acquisition of Mozy, reversal of depreciation expense resulting from the application of fair value measurement to acquired property and equipment and adjustments relating to the tax effect of combining the Carbonite and Mozy businesses.
The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and Mozy. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2018, nor are they intended to represent or be indicative of future results of operations (in thousands):
 
Three Months Ended March 31,
 
2018
Pro forma revenue
$
79,034

Pro forma net (loss) income
$
15,082

Pro forma net (loss) income per common share:
 
Basic
$
0.53

Diluted
$
0.50

7. Goodwill and Acquired Intangible Assets
The following is a rollforward of the Company's goodwill balance (in thousands):
 
Goodwill
Balance as of December 31, 2018
$
155,086

Goodwill acquired
386,413

Effect of foreign exchange rates
(269
)
Balance as of March 31, 2019
$
541,230

Acquired intangible assets consist of the following (in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
 
Weighted-
Average
Estimated
Useful Life
(in years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
Technology-related
6.1
 
$
186,805

 
$
29,760

 
$
157,045

 
$
59,018

 
$
26,551

 
$
32,467

Customer relationships
9.3
 
266,898

 
17,129

 
249,769

 
96,997

 
13,398

 
83,599

Trade names
3.8
 
22,128

 
2,367

 
19,761

 
3,752

 
1,855

 
1,897

Internal-use technology
2.0
 
3,752

 
30

 
3,722

 

 

 

Total
5.3
 
$
479,583

 
$
49,286

 
$
430,297

 
$
159,767

 
$
41,804

 
$
117,963


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The Company recorded amortization expense of $7.6 million and $3.4 million for the three months ended March 31, 2019 and 2018, respectively. Amortization relating to developed technology is recorded within a separate line within cost of revenue and amortization of customer relationships, trade names and internal-use technology are recorded within a separate line within operating expenses.
Future estimated amortization expense of acquired intangibles as of March 31, 2019 is as follows (in thousands):
Remainder of 2019
$
56,533

2020
69,468

2021
64,940

2022
56,227

2023
48,108

Thereafter
135,021

 
$
430,297

8. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Accrued consulting and professional fees
$
12,332

 
$
3,103

Accrued tax liabilities
5,244

 
4,588

Accrued sales and marketing
2,513

 
1,606

Accrued interest
2,285

 
980

Accrued facilities
481

 
1,807

Accrued other expenses
9,844

 
3,565

Total accrued expenses
32,699

 
15,649

 
 
 
 
Current portion of long-term lease liabilities
9,405

 

Current portion of long-term debt
5,479

 

Derivative liability

 
195

Total other current liabilities
14,884


195

 
 
 
 
Total accrued expenses and other current liabilities
$
47,583

 
$
15,844

The Company has also recorded a liability of $132.4 million in purchase price consideration payable within the condensed consolidated balance sheet. The liability represents amounts owed to Webroot option holders in connection with the acquisition and was paid by the Company on April 5, 2019.
9. Stockholders' Equity
Share Repurchase Program
On November 19, 2018, the Company's Board of Directors authorized a $50.0 million share repurchase program in lieu of the previous program that expired in May 2018. Share repurchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise, in accordance with applicable securities laws and regulations. The timing and amount of any share repurchases are determined by the Company's management based on evaluation of market conditions, the trading price of the stock, and other factors.
The Company did not make any repurchases under the programs during the three months ended March 31, 2019 and 2018. At March 31, 2019, approximately $28.5 million remained available under the Company's share repurchase program.
10. Stock-based Awards
Employee Stock Purchase Plan

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On May 18, 2017, the Company's stockholders approved the 2017 ESPP. Under the 2017 ESPP, eligible employees may purchase shares of the Company's common stock, subject to certain limitations, at the lesser of 85% of the beginning or ending withholding period fair market value as defined in the 2017 ESPP. There are two six-month withholding periods in each fiscal year. As of March 31, 2019, rights to acquire 420,314 shares of common stock were available for issuance under the 2017 ESPP.
Stock-based Compensation Expense
Stock-based compensation is reflected in the consolidated statement of operations as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Cost of revenues
$
424

 
$
325

Research and development
946

 
687

General and administrative
1,958

 
2,124

Sales and marketing
877

 
601

Total stock-based compensation expense
$
4,205

 
$
3,737

11. Income Taxes
The Company's effective income tax rates were 138.1% and 326.6% for the three months ended March 31, 2019 and 2018, respectively. The Company's effective income tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax audits or other tax contingencies. For the three months ended March 31, 2019 and 2018, the effective income tax rate varied from the statutory income tax rate principally due to the release of U.S. valuation allowance as a result of the acquisitions of Webroot and Mozy, respectively. The tax benefit recognized during the three months ended March 31, 2019 and 2018, consists of a tax benefit for a U.S. valuation allowance release that is partially offset by foreign tax expense.
The Company's effective income tax rate in the three months ended March 31, 2019 differed from the three months ended March 31, 2018, primarily due to the amount of valuation allowanced that was released in the two periods. The U.S. net deferred tax liability primarily relates to non-tax deductible intangible assets recognized in the financial statements which generate a deferred tax liability. The net deferred tax liability established represents a source of income and provides evidence of the realizability of previously unrecognized deferred tax assets in the U.S. Therefore, the Company has recorded a discrete tax benefit of $5.4 million and $17.6 million in the three months ended March 31, 2019 and 2018, respectively, for the release of valuation allowance related to the deferred tax liability recorded in purchase accounting. As of March 31, 2019, the U.S. no longer maintains a full valuation allowance as it is in a net deferred tax liability position with the addition of Webroot to the U.S. combined group. As of March 31, 2019, the Company maintained a valuation allowance of $3.6 million related specifically to deferred tax assets for state net operating losses for which the realizability remains uncertain.
12. Leases
The Company leases office space to support business activities such as information technology, research and development, product support, development and management, sales and general administration. The Company also leases data center space to store and protect customer data. The Company's office leases expire at varying dates through 2029. The Company's data center leases expire at varying dates through 2023.
On January 1, 2019, the Company adopted ASU 2016-02, Leases using the modified retrospective transition method. The Company has elected an accounting policy to forgo the recognition of lease assets or liabilities for short-term leases. Short-term leases are defined, in accordance with the standard, as those with terms of one year or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not reassess: whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases. The Company has also elected to combine lease and non-lease components when calculating minimum lease payments on new leases for all asset classes. However, in accordance with the standard, variable payments will be excluded from the calculation of lease assets and liabilities. The Company makes variable payments on certain of its leases related to taxes, insurance, utilities, and common area maintenance ("CAM"), among other things.

19

Table of Contents

The Company reviews new contracts as they are executed to identify leases. The Company determines if an arrangement is a lease at the inception of a contract based on whether the contract, or a part of the contract, conveys the right to control the use of a specified asset for a period of time in exchange for consideration. The Company measures right-of-use assets and liabilities at the lease commencement date based on the net present value of fixed lease payments over the lease term. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Right-of-use assets also include any advance lease payments made and exclude lease incentives.
The Company was unable to readily determine the implicit rate on its operating leases. As a result, the Company elected to use incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rates reflect the rates of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis, over a similar term, and in a similar economic environment. Lease expense is recognized on a straight-line basis over the lease term.
Pursuant to the lease agreement for the Company's corporate headquarters in Boston, Massachusetts, the Company has posted a security deposit of $0.8 million, which is maintained as a letter of credit. Pursuant to the lease agreement for the Webroot office located in Broomfield, Colorado, the Company is required to maintain a bank guarantee in the amount of $2.0 million until December 31, 2020, at which point the guarantee begins reducing. This guarantee is considered restricted cash and is included within other assets on the condensed consolidated balance sheet.
Operating lease right-of-use assets and long-term operating lease liabilities are included as separate lines in the condensed consolidated balance sheets. The current portion of operating lease liabilities are included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. In connection with the acquisition of Webroot on March 26, 2019, the Company recorded right-of-use assets of $33.5 million and lease liabilities of $33.5 million on the condensed consolidated balance sheet. As of March 31, 2019, right-of-use lease assets were $55.2 million and lease liabilities were $61.2 million. Of the total lease liabilities as of March 31, 2019, $9.4 million were classified as current.
For the three months ended March 31, 2019, the components of lease expense were as follows:
 
 
Three Months Ended March 31, 2019
(in thousands)
 
Office
Leases
 
Data
Center
Leases
 
Total
Operating lease costs
 
$
814

 
$
916

 
$
1,730

Variable lease costs
 
250

 
603

 
853

Short-term lease costs
 
253

 
92

 
345

Total lease costs
 
$
1,317

 
$
1,611

 
$
2,928

For the three months ended March 31, 2019, cash flows related to leases were as follows:
 
 
Three Months Ended
March 31,
(in thousands)
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Office leases
 
$
1,160

Data center leases
 
948

 
 
$
2,108

Right-of-use assets obtained in exchange for lease obligations:
 
 
Office leases
 
$
47,740

Data center leases
 
8,760

 
 
$
56,500

The following table summarizes the weighted average remaining lease terms and discount rates associated with the Company's leases as of March 31, 2019:

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Table of Contents

 
 
Office Leases
 
Data Center Leases
Operating Leases:
 
 
 
 
Weighted average remaining lease term (in years)
 
7.8

 
2.8

Weighted-average discount rate
 
6.65
%
 
5.92
%
Maturity of lease liabilities under all operating leases as of March 31, 2019, are as follows (in thousands):
Years Ended December 31,
 
Office
Leases
 
Data
Center
Leases
 
Total Undiscounted Cash Flows
Remainder of 2019
 
$
7,032

 
$
2,733

 
$
9,765

2020
 
9,371

 
3,533

 
12,904

2021
 
9,705

 
2,139

 
11,844

2022
 
8,576

 
833

 
9,409

2023
 
7,613

 
70

 
7,683

Thereafter
 
26,405

 

 
26,405

Total
 
$
68,702

 
$
9,308

 
$
78,010

 
 
 
 
 
 
 
Less: present value adjustment
 
$
16,085

 
$
722

 
$
16,807

Lease liabilities
 
$
52,617

 
$
8,586

 
$
61,203

As previously disclosed in the 2018 Annual Report on Form 10-K and under the previous lease accounting standard, ASC 840, Leases, the total commitment for non-cancellable operating leases as of December 31, 2018 was as follows (in thousands):
Years Ended December 31,
 
Office
Leases
 
Data
Center
Leases1
 
Total
2019
 
$
4,194

 
$
4,833

 
$
9,027

2020
 
3,975

 
4,434

 
8,409

2021
 
3,888

 
2,133

 
6,021

2022
 
3,713

 
833

 
4,546

2023
 
3,655

 
70

 
3,725

Thereafter
 
5,183

 

 
5,183

Total
 
$
24,608

 
$
12,303

 
$
36,911

 
 
 
 
 
 
 
(1) Certain amounts in the table above relating to colocation leases for the Company's servers include usage-based charges in addition to base rent.
Rent expense was $2.3 million for the three months ended March 31, 2018. As of December 31, 2018, $4.5 million was included in accrued expenses and other current liabilities and other long-term liabilities related to deferred rent.
13. Commitments and Contingencies    
Other Non-cancellable Commitments
As of March 31, 2019, the Company had non-cancellable commitments to vendors primarily consisting of hosted software, consulting, advertising, marketing and broadband services contracts, as follows (in thousands):
Years Ended December 31,
 
Remainder of 2019
$
20,491

2020
5,559

2021
167

Total
$
26,217


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Litigation
On February 27, 2017, a non-practicing entity named Realtime Data LLC (“Realtime Data”) filed a lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging that the Company’s cloud storage services infringe upon certain patents held by Realtime Data. Realtime Data’s complaint against the Company sought damages in an unspecified amount and injunctive relief. On December 19, 2017, the United States District Court for the Eastern District of Texas transferred the case to the United States District Court of Massachusetts. Realtime Data has filed patent suits against several other companies around the country, and one or more of the asserted patents are currently in various stages of other litigations and/or United States Patent and Trademark Office ("USPTO") post-grant proceedings. No trial date has been set. The Company is defending itself vigorously. The Company has not accrued a loss contingency related to this matter because litigation related to a non-practicing entity is inherently unpredictable. Although a loss is reasonably possible, an unfavorable outcome is not considered by management to be probable at this time and the Company remains unable to reasonably estimate a possible loss or range of loss associated with this litigation.
The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss if reasonably possible to estimate, in situations where the Company assesses the likelihood of loss as probable. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s condensed consolidated financial statements.
14. Restructuring
In October 2017, the Company initiated a restructuring program ("2017 Plan") to streamline operations and reduce operating costs. The 2017 plan was completed in the fourth quarter of 2018. The Company incurred restructuring charges totaling $1.8 million related to employee severance under the 2017 plan.
There were no restructuring charges for the three months ended March 31, 2019, nor did the Company have any amounts accrued related to restructuring charges as of March 31, 2019. The following table summarizes the Company's restructuring activities for the three months ended March 31, 2018 (in thousands):
 
Employee Severance and Related Costs
Accrued restructuring as of December 31, 2017
$
688

Charges
862

Cash payments
(665
)
Non-cash and other adjustments
22

Accrued restructuring as of March 31, 2018
$
907

15. Borrowings and Credit Arrangements
2019 Credit Agreement
On March 26, 2019, in connection with the acquisition of Webroot, the Company entered into a credit agreement (the "Credit Agreement") with Barclays Bank PLC as administrative agent and certain other lenders, for a seven-year senior secured term loan facility of $550.0 million (the "Term Loans") and a five-year secured revolving credit facility of $130.0 million, including a $15.0 million sub-limit for letters of credit and a $15.0 million sub-limit for swingline loans (the "2019 Revolver"). The facilities under the Credit Agreement are secured by substantially all of the Company’s assets and contain customary affirmative and negative covenants, including, among others, certain limitations on the incurrence of indebtedness, guarantees and liens, the making of investments, acquisitions and dispositions, the payment of dividends and the repurchase of capital stock and the repayment, redemption or amendment of subordinated debt.
Upon execution of the Credit Agreement, the Company terminated its previously executed revolving credit facility entered into on March 19, 2018 (the "2018 Revolver"). In accordance with ASC 470-50, Debt Modifications and Exchanges, during the three months ended March 31, 2019, the Company wrote off $0.8 million of unamortized debt issuance costs associated with the 2018 Revolver, which is included within interest expense on the condensed consolidated statement of operations.
Term Loans

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The Term Loans were issued at 99.0% of their face amount and will mature on the earlier of March 26, 2026 or, 91 days prior to the maturity of the Company’s outstanding Convertible Notes, to the extent that, on such date: (1) the Convertible Notes have not been repurchased (and cancelled), redeemed, defeased, repaid, satisfied and discharged or refinanced, (2) the maturity date of the Convertible Notes has not been extended beyond June 26, 2026, and (3) the Company's liquidity is not in excess of the amount required to repay the Convertible Notes at such time plus $20 million.
The Term Loans bear interest at a variable rate calculated as LIBOR plus an applicable margin, as defined in the Credit Agreement. As of March 31, 2019, the interest rate was 6.306%. Principal payments in the amount of 0.25% of the outstanding loan balance as of the closing date are due in quarterly increments beginning on June 30, 2019, with all remaining amounts outstanding due upon maturity. As of March 31, 2019 the Term Loans consisted of the following:
 
March 31, 2019
Principal
$
550,000

Less: debt issuance costs
(3,962
)
Less: debt discount
(15,213
)
Less: current portion
(5,479
)
Long-term debt, net
$
525,346

Revolving Credit Facility
The 2019 Revolver matures on the earlier of March 26, 2024 or, 91 days prior to the maturity of the Company’s outstanding Convertible Notes, to the extent that, on such date: (1) the Convertible Notes have not been repurchased (and cancelled), redeemed, defeased, repaid, satisfied and discharged or refinanced, (2) the maturity date of the Convertible Notes has not been extended beyond June 26, 2024, and (3) the Company's liquidity is not in excess of the amount required to repay the Convertible Notes at such time plus $20 million.
Borrowings under the 2019 Revolver bear interest at a variable rate calculated as LIBOR plus an applicable margin, as defined in the Credit Agreement. The 2019 Revolver contains a financial covenant ratio that the Company must satisfy as of the end of any fiscal quarter when borrowings under the facility exceed a specified percentage of the total availability. As of March 31, 2019, the Company had no outstanding borrowings under the 2019 Revolver.
Convertible Notes
On April 4, 2017, the Company issued, in a private offering, $143.8 million aggregate principal amount of Convertible Notes. The Convertible Notes accrue interest at 2.5% per year, payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes will mature on April 1, 2022, unless earlier repurchased, redeemed or converted.
The conversion rate for the Convertible Notes is initially 38.7034 shares of Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $25.84 per share of common stock. Prior to January 1, 2022, the Convertible Notes will be convertible by the holders only upon satisfaction of the following conditions and during following periods:
1.
During any calendar quarter, if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
2.
During the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day;
3.
If the Company calls any or all of the notes for redemption at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and
4.
Upon the occurrence of certain specified corporate events.
On or after January 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time. The Company may satisfy any conversion obligations by paying or delivering, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at

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the Company's election in the manner and subject to the terms and conditions provided in the indenture governing the Convertible Notes.
The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after April 5, 2020 if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), during any 30 consecutive trading day period ending on the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company received $138.7 million in proceeds from the issuance of the Convertible Notes, net of debt issuance costs and the discounts to the initial purchasers. The Company used $39.2 million of the proceeds to repay all amounts outstanding under its previous revolving credit facility and $15.0 million of the proceeds to repurchase shares of its common stock from purchasers of Convertible Notes in privately negotiated transactions effected through one or more of the initial purchasers or their affiliates conducted concurrently with the pricing of the Convertible Notes. The remaining proceeds will be used for general corporate purposes, including potential acquisitions.
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Convertible Notes. The equity component is included in the additional paid-in-capital portion of stockholders’ equity on the Company’s consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.
In addition, the debt issuance costs and debt discount are allocated between the liability and equity components in proportion to the allocation of the proceeds. The issuance costs and discount allocated to the liability component are capitalized as a reduction of the principal amount of the Convertible Notes payable on the Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Convertible Notes. The issuance costs and discount allocated to the equity component are recorded as a reduction to additional paid-in capital. The Convertible Notes consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Liability component:
 
 
 
Principal
$
143,750

 
$
143,750

Less: debt issuance costs
(536
)
 
(573
)
Less: debt discount
(23,189
)
 
(24,872
)
Net carrying amount
$
120,025

 
$
118,305

Equity component
$
31,451

 
$
31,451

For the three months ended March 31, 2019 and 2018, the Company incurred total interest expense associated with the Convertible Notes as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Interest expense related to contractual interest coupon
$
898

 
$
898

Interest expense related to accretion of the discount
1,683

 
1,543

Interest expense related to debt issuance costs
39

 
36

Total
$
2,620

 
$
2,477

As of March 31, 2019, the net carrying value of the Convertible Notes was $120.0 million, which is net of unamortized debt issuance costs of $0.5 million. The effective interest rate on the Convertible Notes, including amortization of debt issuance costs and accretion of the discount, is 8.7%. At March 31, 2019, the conversion option value of the Convertible Notes does not

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exceed their principal amount since the closing market price of the Company's common stock does not exceed the conversion rate. As of March 31, 2019, the Convertible Notes were not convertible.


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed on February 28, 2019 with the SEC.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our ability to integrate the Webroot acquisition or other acquisitions into our operations and achieve the expected benefits of such acquisitions, our ability to profitably attract new customers and retain existing customers, our dependence on the market for cloud backup services, our ability to manage growth, changes in economic or regulatory conditions or other trends affecting the Internet and the information technology industry, and those discussed in the section titled “Risk Factors” included herein and in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We provide a robust data protection platform for businesses, including backup, disaster recovery, high availability and workload migration technology. The Carbonite data protection platform supports businesses on a global scale with secure cloud infrastructure.
In March 2019, we acquired Webroot, a next-generation cloud-based security and threat intelligence provider for consumers and businesses. Webroot is a leading security provider for managed service providers to protect small businesses, who rely on Webroot for endpoint protection, network protection, and security awareness training. We continue to invest in strategic acquisitions and integrate these acquisitions into our portfolio of technology solutions, in order to expand our addressable market and increase our strategic importance to customers.
On March 19, 2018, we acquired all of the issued and outstanding capital stock of Mozy for a purchase price of $144.6 million in cash, net of cash acquired. On March 26, 2019, we acquired all of the issued and outstanding capital stock of Webroot, a leading cybersecurity company, for a purchase price of $622.0 million in cash, net of cash acquired. We believe these acquisitions strengthen our technology portfolio and position us as a leader in both the endpoint and data protection markets.
In connection with the acquisition of Webroot, we entered into a credit agreement (the "Credit Agreement") with Barclays Bank PLC as administrative agent and certain other lenders, for a seven-year $550.0 million senior secured term loan facility (the "Term Loans") and a five-year senior secured revolving credit facility of $130.0 million, including a $15.0 million sub-limit for letters of credit and a $15.0 million sub-limit for swingline loans (the "2019 Revolver"). Upon execution of the Credit Agreement, we terminated our previously executed facility entered into on March 19, 2018 (the "2018 Revolver").

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We derive the majority of our revenue from subscription fees with consistently strong retention rates. The remainder of our revenue is derived from software arrangements, which often contain multiple revenue elements, such as software licenses, hardware, professional services and post-contract customer support. We sell our solutions globally, and our customers primarily come from the following sources: through our website, our inside sales team, acquisitions, or from our network of channel partners, including distributors, value-added resellers, managed service providers, and global systems integrators.
We invest in customer acquisition because the market for our solutions is highly competitive. We support our sales network with a marketing approach that leverages our growing brand awareness to generate broad market demand. Our marketing efforts are designed to attract prospective customers and enroll them as paying customers, either through immediate sales, free trials or communication of the benefits of our solutions and development of ongoing relationships.
Our operating costs continue to grow as we invest in strategic acquisitions, new customer acquisition, cross-sell efforts, and research and development. We expect to continue to devote substantial resources to integration, global expansion, customer acquisition, and product innovation.
For the majority of our business, we defer revenue over our customers’ subscription periods but expense marketing costs as incurred. Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("Topic 606") which impacts the recognition of costs incurred in obtaining contracts with customers. Under Topic 606, we amortize these costs, which primarily relate to commissions, over the period of benefit. While we have experienced periods of GAAP operating income, we may incur GAAP operating losses in future periods.
Our Business Model
As the majority of our business is driven by subscription services, we evaluate the profitability of a customer relationship over the life of the customer relationship. We generally incur customer acquisition costs and capital equipment costs in advance of subscriptions while recognizing revenue ratably over the term of the subscriptions. As a result, a customer relationship may not be profitable or result in positive cash flow at the beginning of the subscription period, even though it may be profitable or result in positive cash flow over the life of the customer relationship. While we offer monthly, annual and multi-year subscription plans, a majority of our customers are currently on annual subscription plans. The annual or multi-year commitments of our customers enhance management’s visibility into revenue, and charging customers at the beginning of the subscription period provides working capital.
Additional information about our business and operations is contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019.
Key Business Metrics
Our management regularly reviews a number of financial and operating metrics, including the key metrics listed below. Based on the recent acquisition of Webroot, our management no longer uses adjusted free cash flow or bookings to evaluate the performance of the combined business. We may further amend our key business metrics in future periods as the integration of Webroot progresses.
Adjusted EBITDA is a financial metric that is not calculated in accordance with GAAP. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Refer to “Other Financial Data” for a reconciliation to the most comparable financial measure presented in accordance with GAAP. 
Annual retention rate. We calculate annual retention rate as the percentage of subscription customers on the last day of the prior year who remain customers on the last day of the current year, or for quarterly presentations, the percentage of customers on the last day of the comparable quarter in the prior year who remain customers on the last day of the current quarter. Our management uses these measures to determine the stability of our customer base and to evaluate the lifetime value of our customer relationships. The annual retention rate for the three months ended March 31, 2019 excludes customers from our recent Webroot acquisition.
Renewal rate. We define renewal rate for a period as the percentage of customers who renew annual or multi-year subscriptions that expire during the period presented. Our management uses this measure to monitor trends in customer renewal activity. The renewal rate for the three months ended March 31, 2019 excludes customers from our recent Webroot acquisition.
Adjusted EBITDA. We calculate adjusted EBITDA by excluding the impact of interest expense, net, income taxes, depreciation, amortization, purchase accounting adjustments on acquired deferred revenue, stock-based

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compensation expense, litigation-related expense, restructuring-related expense, and acquisition-related expense from net income.
Subscription renewals may vary during the year based on the date of our customers’ original subscriptions. As we recognize subscription revenue ratably over the subscription period, this generally has not resulted in a material seasonal impact on our revenue but may result in material monthly and quarterly variances in one or more of the key business metrics described above.
Performance Highlights
For the three months ended March 31, 2019 and 2018, we had the following results:
Revenue for the three months ended March 31, 2019 was $81.2 million, an increase of 27% from $64.0 million for the three months ended March 31, 2018.
Cash flow from operations for the three months ended March 31, 2019 was $18.7 million, compared to $3.3 million for the three months ended March 31, 2018.
Net income for the three months ended March 31, 2019 was $2.0 million, compared to $11.9 million for the three months ended March 31, 2018.
The following table presents our performance highlights for certain non-GAAP and other key metrics for the periods presented:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands, except percentage data)
Key metrics1,2:
 
 
 
Annual retention rate
85
%
 
87
%
Renewal rate
83
%
 
83
%
Adjusted EBITDA
$
24,855

 
$
12,281

 
 
 
 
(1) See the Key Business Metrics section above for the definition of these key metrics, and refer to the Other Financial Data section below for the reconciliation of adjusted EBITDA to the most directly comparable financial measure presented in accordance with GAAP.
(2) The annual retention rate and renewal rate for the three months ended March 31, 2019 exclude customers from our recent acquisition of Webroot.
Adjusted EBITDA increased $12.6 million for the three month period ended March 31, 2019 compared to the corresponding period in 2018 primarily due to higher add-backs to net income related to interest, tax, and depreciation and amortization of $15.7 million. Net add-backs related to the fair value adjustment of acquired deferred revenue, stock-based compensation, and litigation, restructuring and acquisition expense also increased by $6.8 million. These increases were offset by lower net income of $9.9 million.
Key Components of our Consolidated Statements of Operations
Revenue
Services. Services revenues consist of SaaS and HaaS offerings, M&S services and professional services consisting of implementation, training, migration, protection and consulting. Revenues related to the SaaS and HaaS offerings are recorded over the performance period of the services. M&S services generally consist of telephone, email, or live chat support, as well as updates and upgrades to the software licenses on an if and when available basis. Revenues from M&S are recorded ratably over the time of performance. Professional service revenue is recognized over time as services are delivered.
Product. Product revenues consist of different types of on-premise data protection and migration software, licensed on a time or perpetual basis, and as royalty arrangements. Revenues from product licenses are recorded when control of the product has been transferred to the customer. We also offer hardware on a standalone basis or in conjunction with our software. Hardware sales are recorded as revenue when control is transferred to the customer.
Cost of revenue

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Services. Cost of services revenue consists primarily of costs associated with our data center operations and customer support centers, including wages and benefits for personnel, depreciation of equipment, rent, utilities and broadband, equipment maintenance, hosting fees, software license fees, and allocated overhead. The expenses associated with hosting our services and supporting our customers are related to the number of customers and the complexity of our services and hosting infrastructure. Our cost of storage, on a per gigabyte (GB) basis has decreased over time due to decreases in storage prices and realizing greater efficiency in our data center operations. We have also experienced a downward trend in the cost of storage equipment and broadband service, which we expect will continue in the future. Over the long term, we expect these expenses to increase in absolute dollars, but decrease as a percentage of revenue due to improved efficiencies in supporting customers.
Products. Cost of product revenue consists primarily of hardware costs and royalty costs associated with licensing software from third-parties.
Amortization of intangible assets. Amortization of acquired technologies and licenses are included in cost of revenues. Intangibles are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.
Gross profit and gross margin
Historically, our gross margins have expanded due to the introduction of higher priced solutions, a downward trend in the cost of storage equipment and services, and efficiencies of our customer support personnel in supporting our customers. We expect these trends to continue over the long term.
Operating expenses
Research and development. Research and development expenses consist primarily of wages and benefits for development personnel, third-party outsourcing costs, hosting fees, consulting fees, rent, and depreciation. We focus our research and development efforts on the development of new products and enhancements and ease of use of our existing solutions. These efforts result in updated versions, while not changing the underlying technology. The majority of our research and development employees are located at our corporate headquarters in the U.S. and at our office in Canada. We expect that research and development expenses will increase in absolute dollars on an annual basis with the acquisition of Webroot and as we continue to enhance and expand our services.
General and administrative. General and administrative expenses consist primarily of wages and benefits for management, finance, accounting, human resources, legal and other administrative personnel, legal and accounting fees, insurance, acquisition and other corporate expenses. We expect that general and administrative expenses will increase in absolute dollars on an annual basis so that we can support the growth of our business, including the acquisition of Webroot.
Sales and marketing. Sales and marketing expenses consist primarily of wages and benefits for sales and marketing personnel, advertising costs, creative expenses for advertising programs, credit card fees, commissions paid to third-party partners and affiliates, and the cost of providing free trials. We expect that we will continue to commit significant resources to our sales and marketing efforts to grow our business and awareness of our brand and solutions.
Amortization of intangible assets. Amortization of acquired customer relationships, trade names, internal-use software, and non-compete agreements are included in operating expenses. Intangibles are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.
Restructuring charges. Restructuring charges consist of charges related to our restructuring efforts associated with the reorganization and consolidation of certain operations as well as disposal of certain assets. See Note 14—Restructuring to our consolidated financial statements included in this Quarterly Report for additional information.
Results of Operations
The following table sets forth, for the periods presented, data from our condensed consolidated statements of operations as a percentage of revenue that each line item represents. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

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Three Months Ended
March 31,
 
2019
 
2018
 
(% of total revenue)
Consolidated statements of operations data:
 
 
 
Revenue:
 
 
 
Services
88.0
 %
 
85.2
 %
Product
12.0

 
14.8

Total revenue
100.0

 
100.0

Cost of revenue:
 
 
 
Services
21.1

 
23.9

Product
0.5

 
0.9

Amortization of intangible assets
4.0

 
3.8

Total cost of revenue
25.6

 
28.6

Gross profit
74.4

 
71.4

Operating expenses:
 
 
 
Research and development
19.5

 
19.6

General and administrative
25.8

 
22.6

Sales and marketing
26.8

 
31.0

Amortization of intangible assets
5.3

 
1.5

Restructuring charges

 
1.3

Total operating expenses
77.4

 
76.0

Loss from operations
(3.0
)
 
(4.6
)
Interest expense
(4.9
)
 
(4.1
)
Interest income
1.2

 
0.5

Other income (expense), net
0.3

 

Loss before income taxes
(6.4
)
 
(8.2
)
Benefit for income taxes
(8.9
)
 
(26.9
)
Net income
2.5
 %
 
18.7
 %
Comparison of the Three Months Ended March 31, 2019 and 2018
Revenue
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
 
(in thousands, except percentage data)
Revenue:
 
 
 
 


 


Services
$
71,503

 
$
54,574

 
$
16,929

 
31.0
%
As a % of total revenue
88.0
%
 
85.2
%
 
 
 
 
Product
9,712

 
9,452

 
260

 
2.8
%
As a % of total revenue
12.0
%
 
14.8
%
 
 
 
 
Total revenue
$
81,215

 
$
64,026

 
$
17,189

 
26.8
%
Services revenue increased for the three month period ended March 31, 2019 compared to the corresponding period in 2018, primarily due to the full contribution of revenue from our Mozy offerings over the comparative period.
Product revenue remained consistent for the three month period ended March 31, 2019 compared to the corresponding period in 2018.




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Cost of revenue, gross profit, and gross margin
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
 
(in thousands, except percentage data)
Cost of revenue:
 
 
 
 
 
 
 
Services
$
17,102

 
$
15,330

 
$
1,772

 
11.6
 %
Product
383

 
557

 
(174
)
 
(31.2
)%
Amortization of intangible assets
3,294

 
2,425

 
869

 
35.8
 %
Total cost of revenue
$
20,779

 
$
18,312

 
$
2,467

 
13.5
 %
As a % of total revenue
25.6
%
 
28.6
%
 
 
 
 
Gross profit
$
60,436

 
$
45,714

 


 


Gross margin
74.4
%
 
71.4
%
 


 


Our total gross margin increased for the three month period ended March 31, 2019, as compared to the three month period ended March 31, 2018, driven principally by an increase in service revenue, partially offset by an increase in cost of services and amortization of developed technology intangible assets associated with Mozy and Webroot.
Cost of services revenue
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
 
(in thousands, except percentage data)
Cost of services revenue
$
17,102

 
$
15,330

 
$
1,772

 
11.6
 %
As a % of service revenue
23.9
%
 
28.1
%
 
 
 
 
As a % of total revenue
21.1
%
 
23.9
%
 
 
 
 
Components of cost of services revenue:
 
 
 
 
 
 
 
Personnel-related costs
$
7,470

 
$
6,643

 
$
827

 
12.4
 %
Hosting, depreciation and facilities costs
6,497

 
5,348

 
1,149

 
21.5
 %
Software, consulting and other
3,135

 
3,339

 
(204
)
 
(6.1
)%
Total cost of services revenue:
$
17,102

 
$
15,330

 
$
1,772

 
11.6
 %
Cost of services revenue increased for the three month period ended March 31, 2019, as compared to the three month period ended March 31, 2018, primarily related to an increase of $0.7 million in depreciation and $0.9 million facilities costs included within hosting, depreciation and facilities costs associated with supporting our acquired Mozy customer base. There was also an increase in personnel-related costs associated with additional headcount from our acquisition of Mozy.
Cost of product revenue
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
 
(in thousands, except percentage data)
Cost of product revenue
$
383

 
$
557

 
$
(174
)
 
(31.2
)%
As a % of product revenue
3.9
%
 
5.9
%
 
 
 
 
As a % of total revenue
0.5
%
 
0.9
%
 
 
 
 
Cost of product revenue remained consistent for the three month period ended March 31, 2019, as compared to the three month period ended March 31, 2018.