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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2020

☐	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: 001-37637

MIMECAST LIMITED

(Exact Name of Registrant as Specified in its Charter)

Bailiwick of Jersey	Not applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1 Finsbury Avenue London EC2M 2PF United Kingdom	EC2M 2PF
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 996-5340

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)
Ordinary Shares, nominal value $0.012 per share	MIME	The Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised 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 ☒

As of January 28, 2021, the registrant had 64,382,729 shares of ordinary shares, $0.012 par value per share, outstanding.

Summary of the Material and Other Risks Associated with Our Business

The following is a summary of the material and other risks that could adversely affect our business and financial results:

Business and Operational Risks

•

The global COVID-19 pandemic has had, and we expect will continue to have, certain negative impacts on our business and operations.

•

Data security and integrity are critically important to our business, and breaches of our information and technology networks and unauthorized access to a customer’s data could harm our business and operating results.

•

If we are unable to attract new customers, sell additional services, features and products to our existing customers, and retain customers, our business and results of operations will be affected adversely.

•

The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.

•

Failure to effectively expand our sales and marketing capabilities could harm our ability to acquire new customers.

•

Our business and results of operations may be negatively impacted by the United Kingdom’s withdrawal from the European Union.

•

Any serious disruptions in our services may cause us to lose revenue and market acceptance.

•

If we are unable to increase sales to large enterprises, our business, financial position and results of operations may suffer.

•

We must maintain successful relationships with our channel partners.

•

We provide service level commitments under our subscription agreements and service disruptions, including any related to our recently disclosed security incident, could obligate us to provide refunds and we could face subscription terminations.

•

We have acquired, and may acquire in the future, other businesses, products or technologies, which could require significant management attention, disrupt our business, dilute shareholder value and adversely affect our results of operations.

•

If we are not able to provide successful updates, enhancements and features to our technology to, among other things, keep up with emerging cyber threats and customer needs, our business could be adversely affected.

•

We are subject to a number of risks associated with global sales and operations.

•

If the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.

•

Our research and development efforts may not produce new services or enhancements to existing services.

•

We employ third-party licensed software for use in or with our services, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

•

Interruptions or performance problems associated with our information and technology infrastructure that could impair the delivery of our services and harm our business.

•

Our restructuring actions may be costly and may not be as effective as anticipated.

Legal and Regulatory Risks

•

Data privacy concerns, evolving regulations of cloud computing, cross-border data transfer restrictions and other domestic or foreign laws and regulations may limit the use and adoption of, or require modification of, our products and services.

•

We are subject to governmental export controls and funds dealings restrictions that could impair our ability to compete in certain international markets and subject us to liability if we are not in full compliance with applicable laws.

•

We may become involved in other litigation that may materially adversely affect us.

Human Capital Risks

•

We are dependent on the continued services and performance of our key employees, including our co-founder.

•

If we are unable to hire, retain and motivate qualified personnel, our business may be adversely impacted.

•

Our planned workforce reductions may adversely affect our business.

Risks Related to Intellectual Property

•

Third parties have sued us for alleged infringement of their proprietary rights.

•

Failure to protect our intellectual property rights could impair our ability to protect our technology and our brand.

•

Our employees may disclose trade secrets and other proprietary information.

•

Our employees or contractors may wrongfully use alleged trade secrets of their former employers or other parties.

•

The use of open source software in our offerings may expose us to additional risks and harm our intellectual property.

Financial Risks

•

Because we recognize revenue from subscriptions for our services over the term of the agreement, downturns or upturns in new business may not be immediately reflected in our operating results and may be difficult to discern.

•

We have incurred net losses in the past, and we may not be able to achieve or sustain profitability for the foreseeable future.

•

Fluctuations in currency exchange rates could adversely affect our business.

•

Financial covenants and other restrictions under our Credit Agreement create default risks and reduce our flexibility

•

We must maintain the adequacy of internal controls over financial reporting.

Tax Risks

•

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, including issues related to our tax residence, allocations of our taxable income among our subsidiaries, and limitations on our use of net operating losses or tax credit carryforwards.

Risks Related to Owning Our Ordinary Shares and Our Organization in Jersey, Channel Islands

•

Our share price has been and may continue to be volatile based on many factors, many of which are not within our control.

•

If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

•

We do not expect to pay dividends and investors should not buy our ordinary shares expecting to receive dividends.

•

The rights afforded to shareholders are governed by Jersey law. Not all rights available to shareholders under English law or U.S. law will be available to shareholders, potentially including the ability to enforce civil liabilities against us.

The summary described above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the Securities and Exchange Commission. If any such risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations. For more information on these risk factors, see Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2020 and 2019	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended December 31, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2020 and 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	37
PART II.	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 6.	Exhibits	59
Signatures		63

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

	As of December 31,			As of March 31,
	2020			2020
Assets
Current assets
Cash and cash equivalents	$	270,897		$	173,958
Accounts receivable, net		97,640			97,659
Deferred contract costs, net		14,771			11,133
Prepaid expenses and other current assets		19,205			16,145
Total current assets		402,513			298,895

Property and equipment, net		94,099			85,178
Operating lease right-of-use assets		134,051			116,564
Intangible assets, net		45,829			38,394
Goodwill		178,645			150,525
Deferred contract costs, net of current portion		46,236			36,664
Other assets		3,513			3,614
Total assets	$	904,886		$	729,834

Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	10,690		$	14,907
Accrued expenses and other current liabilities		58,071			41,607
Deferred revenue		210,295			194,151
Current portion of finance lease obligations		589			1,058
Current portion of operating lease liabilities		33,398			30,379
Current portion of long-term debt		8,459			6,573
Total current liabilities		321,502			288,675

Deferred revenue, net of current portion		12,462			12,816
Long-term finance lease obligations		4			323
Operating lease liabilities		118,522			105,321
Long-term debt		97,104			86,258
Other non-current liabilities		9,373			4,386
Total liabilities		558,967			497,779

Commitments and contingencies (Note 13)

Shareholders' equity
Ordinary shares, $0.012 par value, 300,000,000 shares authorized; 64,346,682 and 62,791,691 shares issued and outstanding as of December 31, 2020 and March 31, 2020, respectively		772			754
Additional paid-in capital		393,911			325,808
Accumulated deficit		(59,683	)		(83,660	)
Accumulated other comprehensive income (loss)		10,919			(10,847	)
Total shareholders' equity		345,919			232,055
Total liabilities and shareholders' equity	$	904,886		$	729,834

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

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three months ended December 31,						Nine months ended December 31,
	2020			2019			2020			2019
Revenue	$	129,636		$	110,158		$	367,505		$	312,746
Cost of revenue		31,572			28,455			89,783			80,056
Gross profit		98,064			81,703			277,722			232,690
Operating expenses
Research and development		25,408			20,801			70,497			59,506
Sales and marketing		45,187			42,753			133,224			127,288
General and administrative		16,649			16,520			50,400			48,723
Total operating expenses		87,244			80,074			254,121			235,517
Income (loss) from operations		10,820			1,629			23,601			(2,827	)
Other income (expense)
Interest income		261			727			612			2,823
Interest expense		(578	)		(1,106	)		(2,251	)		(3,581	)
Foreign exchange income (expense) and other, net		1,441			(93	)		4,365			159
Total other income (expense), net		1,124			(472	)		2,726			(599	)
Income (loss) before income taxes		11,944			1,157			26,327			(3,426	)
Provision for income taxes		1,155			951			2,350			1,299
Net income (loss)	$	10,789		$	206		$	23,977		$	(4,725	)

Net income (loss) per ordinary share
Basic	$	0.17		$	0.00		$	0.38		$	(0.08	)
Diluted	$	0.16		$	0.00		$	0.37		$	(0.08	)
Weighted-average number of ordinary shares outstanding
Basic		63,987			62,189			63,509			61,822
Diluted		66,023			63,996			65,419			61,822

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

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three months ended December 31,					Nine months ended December 31,
	2020		2019			2020		2019
Net income (loss)	$	10,789	$	206		$	23,977	$	(4,725	)
Other comprehensive income:
Net unrealized losses on investments, net of tax		—		(21	)		—		(28	)
Change in foreign currency translation adjustment		15,775		3,220			21,766		5,775
Total other comprehensive income		15,775		3,199			21,766		5,747
Comprehensive income	$	26,564	$	3,405		$	45,743	$	1,022

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

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Three months ended December 31, 2020
												Accumulated
	Ordinary Shares					Additional						Other			Total
	Number of					Paid-in			Accumulated			Comprehensive			Shareholders'
	Shares			Amount		Capital			Deficit			Income (Loss)			Equity
Balance as of September 30, 2020		63,843		$	766	$	368,813		$	(70,472	)	$	(4,856	)	$	294,251
Net income		—			—		—			10,789			—			10,789
Foreign currency translation adjustment		—			—		—			—			15,775			15,775
Issuance of ordinary shares upon exercise of share options		378			5		8,812			—			—			8,817
Share-based compensation		—			—		13,833			—			—			13,833
ESPP Purchases		91			1		3,320			—			—			3,321
Tax withholding on ESPP purchases and vesting of RSUs		(17	)		—		(867	)		—			—			(867	)
Vesting of RSUs		52			—		—			—			—			—
Balance as of December 31, 2020		64,347		$	772	$	393,911		$	(59,683	)	$	10,919		$	345,919

	Nine months ended December 31, 2020
													Accumulated
	Ordinary Shares						Additional						Other			Total
	Number of						Paid-in			Accumulated			Comprehensive			Shareholders'
	Shares			Amount			Capital			Deficit			Income (Loss)			Equity
Balance as of March 31, 2020		62,792		$	754		$	325,808		$	(83,660	)	$	(10,847	)	$	232,055
Net income		—			—			—			23,977			—			23,977
Foreign currency translation adjustment		—			—			—			—			21,766			21,766
Issuance of ordinary shares upon exercise of share options		1,160			14			24,683			—			—			24,697
Share-based compensation		—			—			41,183			—			—			41,183
ESPP Purchases		178			2			6,414			—			—			6,416
Tax withholding on ESPP purchases and vesting of RSUs		(109	)		(1	)		(4,174	)		—			—			(4,175	)
Vesting of RSUs		326			3			(3	)		—			—			—
Balance as of December 31, 2020		64,347		$	772		$	393,911		$	(59,683	)	$	10,919		$	345,919

	Three months ended December 31, 2019
										Accumulated
	Ordinary Shares				Additional					Other			Total
	Number of				Paid-in		Accumulated			Comprehensive			Shareholders'
	Shares		Amount		Capital		Deficit			Loss			Equity
Balance as of September 30, 2019		61,953	$	743	$	292,575	$	(86,391	)	$	(4,307	)	$	202,620
Net loss		—		—		—		206			—			206
Foreign currency translation adjustment		—		—		—		—			3,220			3,220
Unrealized losses on investments		—		—		—		—			(21	)		(21	)
Issuance of ordinary shares upon exercise of share options		440		5		6,206		—			—			6,211
Share-based compensation		—		—		9,732		—			—