UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended SeptemberJune 30, 20172018

For the transition period fromto

Commission FileNumber 001-36780

Hortonworks, Inc.

(Exact name of Registrant as specified in its Charter)

Registrant’s telephone number, including area code:(408) 916-4121

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    YES  ☒    NO  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-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” inRule 12b-2 of the Exchange Act. (Check one):

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 inRule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The number of shares of Registrant’s Common Stock outstanding as of October 31, 2017August 1, 2018 was 70,532,245.81,351,499.

Table of Contents

PART I – FINANCIAL INFORMATION

HORTONWORKS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

HORTONWORKS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

HORTONWORKS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

HORTONWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Hortonworks, Inc. (the “Company”) was incorporated in Delaware in 2011 and is an industry-leading innovator that creates, distributes and supports a new class of enterprisedelivers 100 percent open-source global data management software solutions built upon open source technology. The Company’sso that customers use its enterprise-scalecan deploy modern data management platformsarchitectures and services to maximizerealize the full value of their data. The Company’s enterprise-ready solutions enable organizations to govern, secure and manage data by generating business insightsof any kind, wherever it is located, and supportingturn it into actionable intelligence that will help them transform their predictive and real-time analytic requirements.

The Hortonworks Data Platform (“HDP”^®) is a foundational element of the Company’s offerings. HDP is an enterprise-scale data management platform built upon open source software including Apache^™ Hadoop^®. HDP’s architecture enables the combination of computer servers with local storage and open source software to create a scalable and secure distributed compute and storage platform for large data sets. Within the platform, a computing and resource management framework called Yet Another Resource Negotiator (“YARN”), orchestrates and enables a centralized architecture for batch, interactive and real-time data workloads to be executed simultaneously within a comprehensive security, governance and operational set of services. HDP integrates with existing data center technologies in a way that augments existing data center infrastructures, thus enabling more data to be brought under management.businesses.

The Company’s complementary solution, Hortonworks DataFlow (“HDF”^™),platformsallow enterprises to manage their data on a global scale, whether it is an enterprise-scaledata-in-motion ordata-at-rest. The Company has the expertise, experience and proven solutions to power modern data ingestapplications, including streaming analytics, data science, artificial intelligence and stream processing platform built upon open source software, including Apache NiFi. HDF is architected to support new data types, such as sensor and machine data, server log data, clickstream data,geo-location data and social data. These data sets may be captured at the edge of a network, including a device such as a point of sale terminal, component of machinery or otherend-point, and then ingested into HDP. This collected data may then be curated with existing data resident within HDP to support full fidelity and enable real-time analytic use cases.

Today, customers increasingly generate data in the cloud, at the edge of a network andon-premises. This diversity is driving evolutionary changes for the data platform layer. The flexibility of computing resources in the cloud supportson-demand scalability and thus, the underlying data management platforms themselves must evolve to meet the increasing needs for manageability, security and governance. The Hortonworks DataPlane Service (“Hortonworks DPS”^™), which integrates with the Company’s HDP and HDF platforms, addresses this need by enabling customers to globally manage, govern and secure data from multiple sources within this hybrid environment. Hortonworks DPS uniquely leverages open source technologies like Apache Atlas to accomplish this while also creating compatibility with a broad array of data center technologies upon which new services and partner applications can be built.

In December 2014, the Company completed its initial public offering and concurrent private placement (collectively, the “IPO”). In February 2016, the Company completed afollow-on public offering of an aggregate of 9,688,750 shares of its common stock, including 1,263,750 additional shares sold pursuant to the full exercise of the option to purchase additional shares by the underwriters, at a public offering price of $9.50 per share. Net proceeds to the Company were approximately $87.7 million after deducting underwriting discounts and commissions and offering expenses.more.

Basis of Presentation and Consolidation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all normal recurring adjustments, except as otherwise disclosed, that are necessary for a fair statement of the Company’s results for the interim periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.2017. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 20162017 was derived from the Company’s audited financial statements for the year ended December 31, 2016,2017, but does not include all disclosures required by U.S. GAAP as permitted by the applicable rules and regulations of the SEC regarding interim financial reporting. However, the Company believes the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, the related disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs regarding what may occur in the future given available information. Estimates, assumptions and judgments are used for, but are not limited to, revenue recognition, stock-based awards, and warrants, accounting for income taxes, allowance for doubtful accounts valuation and determination of other-than-temporary impairments of notes receivable and certain accrued liabilities. Actual results may differ from these estimates.

Recently Issued Accounting Pronouncements

In May 2017,June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-07,Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,which expands the scope of Topic 718 to include shared-based payment transactions for acquiring goods and services from nonemployees. Under the standard, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that adoption of ASU2018-07 will have on its condensed consolidated financial statements.

In February 2016, FASB issued ASUNo. 2016-02,Leases (Topic 842), which, for operating leases, requires a lessee to recognize aright-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application at the beginning of the earliest comparative period presented. The Company is in the process of identifying the relevant population of potential lease arrangements and evaluating these arrangements in the context of ASU2016-02. While the Company continues to evaluate the effect of adoption on its condensed consolidated financial statements, it expects the adoption will result in the recognition ofright-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on its condensed consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In May 2017, the FASB issued ASUNo. 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not anticipate thatadoptedASU 2017-09 willas of January 1, 2018 and the adoption did not have a materialan impact on its condensed consolidated financial statements.statements as of June 30, 2018.

In January 2017,November 2016, FASB issuedASU No. 2017-04,2016-18, Intangibles-Goodwill and OtherStatement of Cash Flows (Topic 350)230): Simplifying the Test for Goodwill ImpairmentRestricted Cash, which eliminates Step 2 from the goodwill impairment test. The standard requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The ASU is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate thatASU 2017-04 will have a material impact on its condensed consolidated financial statements.

In January 2017, FASB issuedASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of addingprovides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)decrease the diversity in practice in the classification and presentation of assets or businesses.changes in restricted cash on the statements of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not anticipate thatadoptedASU 2017-01 will2016-18 as haveof January 1, 2018 and as a material impact on its condensed consolidated financial statements.result of the adoption, the Company no longer presents the changes in restricted cash balances as a component of cash flows from investing activities, but instead includes the balances of restricted cash with cash and cash equivalents for the beginning and end of the periods presented.

In May 2014, FASB issued ASUASU No. 2014-09,Revenue from Contracts with Customers (Topic 606)(. Topic 606 supersedes the “new standard”), which will replace most existing revenue recognition guidancerequirements in U.S. GAAP when it becomes effective. The new standardAccounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“Topic 605”), and requires an entity to recognize the amountrecognition of revenue as promised goods or services are transferred to customers in an amount that reflects the consideration which itthe entity expects to be entitled upon transfer of promisedto in exchange for those goods or services to customers. The new standard defines a five-step process in order to achieve this core principle, which may require the use of judgmentservices. Topic 606 also includes Subtopic340-40,Other Assets and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used.

In August 2015, FASB issuedASU No. 2015-14, Revenue fromDeferred Costs; Contracts with Customers (Topic 606): Deferral of Effective Date, which defersrequires the effective datedeferral of the new standard by one year allowing early adoption asincremental costs of the original effective date of January 1, 2017. The deferral results in the new revenue standard being effective forobtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic340-40as of January 1, 2018. Additional ASUs have been issued to amend or clarify the new standard as follows:“new standard.”

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company is adoptingadopted the new standard as of January 1, 2018 using the modified retrospective approach. The Company’s decision was based onAs a numberresult of factors suchadopting ASU2014-09 (Topic 606) and its corresponding ASUs, accumulated deficit decreased by $25.1 million and as the significancea result of the impactadopting ASC340-40, accumulated deficit decreased by $52.5 million as of the new standard on the Company’s financial results, system readiness, including that of software procured from third-party providers, and the Company’s ability to accumulate and analyze the information necessary to assess the cumulative effect of the new standard through January 1, 2018.

The Company is continuing to evaluate themost significant impact of the new standard onadopting ASU2014-09(Topic 606) and its accounting policies, processes and system requirements. The Company has assigned internal resources in additioncorresponding ASUs relates to the engagement of third-party service providers to assist in the evaluation and to provide periodic updates to management and the Audit Committee. In evaluating the risks associated with the adoption of the new accounting standard, the Company has identified and scoped the different revenue streams and reviewed contracts in each revenue stream for terms and conditions that could result in different accounting treatment. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, significant impacts are expected to the timing and amount of support subscription and professional services revenue recognized, as well as the capitalization and amortization of contract acquisition costs. In addition, the Company will update certain disclosures, as applicable, included in its filings pursuant to the Securities Exchange Act of 1934, as amended, to meet the requirements of the new standard.

Under current industry-specific software revenue recognition guidance, the Company has concluded it has not established vendor-specific objective evidence of fair value (“VSOE”) for support subscriptions and professional services offerings in multiple-element arrangements where support subscriptions are sold with professional services. The Company recognizes revenue on a ratable basis over the period beginning when both the support subscription and professional services have substantially commenced, and ending at the conclusion of the support subscription or professional services period, whichever is longer. The new standard, which does not retain the concept of VSOE, requires an evaluation of whether support subscriptions and professional services are distinct performance obligations, and therefore should be separately recognized as the respective performance obligations are satisfied based on the standalone selling price for each performance obligation, which may not be on a ratable basis. Based on the Company’s evaluation under the new standard, the timing of revenue recognition will change significantly for professional services bundled in multiple-element arrangements and currently recognized ratably due to lack of VSOE for support subscriptions.arrangements. In particular, because professional services revenue will beis recognized as the services are delivered under the new standard, such revenue is recognized in an earlier period and over a shorter timeframe, under the new standard as the services are delivered compared to the Company’s current accounting policy underprior to the existing standards and guidance.adoption of the new standard. Also, the timing of recognition will changechanged to begin in an earlier period for some support subscriptions bundled in multiple-element arrangements compared to the Company’s current accounting policy prior to the adoption of the new standard for multiple-element arrangements whereby recognition generally beginsbegan when both the support subscription and professional services havehad substantially commenced.

As part of its preliminary evaluation, the Company has also considered the impact of the guidance in Accounting Standards Codification(“ASC”) 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB TRG for Revenue Recognition from their November 7, 2016 meeting with respectPrior to the capitalization and amortizationadoption of incremental costs of obtaining a contract (e.g., sales commissions). For contracts with an expected duration greater than one year, the new standard requires the capitalization of incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided the Company expects to recover the costs. Such capitalized costs are then to be amortized on a systematic basis that is consistent with the transfer to the customer of the services to which such costs relate, and the amortization period may extend beyond the initial contract term if renewal commissions on expected renewals are not commensurate with the commission on the initial contract. Under the Company’s current accounting policy,ASC340-40, incremental costs incurred to obtain a contract arewere expensed when incurred. Thus, the application of the new standard will resultresulted in a significant change to the Company’s current accounting policy, for contract acquisition costs, which will resultresulted in the Company recognizing the expense for contract acquisition costs in a different period, as these costs are now amortized over longer periods.

The Company elected to apply the modified retrospective method only to contracts that were not substantially complete as of January 1, 2018 and over a longer period, comparedelected to consider the Company’s current practiceaggregate effect of all contract modifications as of that date. The comparative information before the effective date has not been adjusted and continues to be reported under the existing standards and guidance.Topic 605.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

AsImpacts on Financial Statements

The following tables summarize the impacts of Septemberadopting Topic 606 and Subtopic340-40 (the “new standard”) on the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2017, the Company is in the process of implementing changes to its accounting policies, business processes, systems and controls to support recognition and disclosure2018. The Company’s financial reporting under the new standardandASC 340-40, Other Assets and Deferred Costs; Contracts with Customers and related guidance. The Companystandard is also in the process of quantifying the financial impact of adopting these standards and will disclose such impact in 2018.

Recently Adopted Accounting Pronouncements

In March 2016, FASB issuedASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions for both publicand non-public entities, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statements of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted the new standard as of January 1, 2017. As a result of adopting this standard, the Company made an accounting policy election to account for forfeitures as they occur. This change was applied on a modified retrospective basis, resulting in a cumulative-effect adjustment increasing accumulated deficit by $0.7 million as of January 1, 2017.

Prior to January 1, 2017, the Company recognized the excess tax benefits of stock-based compensation expense asadditional paid-in capital, and tax deficiencies of stock-based compensation expense in the income tax provision or asadditional paid-in capital to the extent that there were sufficient recognized excess tax benefits previously recognized. As a result of the prior requirement that excess tax benefits reduce taxes payable prior to being recognized as an increase in additionalpaid-in capital, the Company had not recognized certain deferred tax assets (all tax attributes such as loss or credit carryforwards) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting.

Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with the new standard to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The change was applied on a modified retrospective basis; no prior periods were restated as a result of this change in accounting policy.

The new standard also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized as an increase in additionalpaid-in capital. Approximately $38.4 million of federal net operating losses and $24.4 million of state net operating losses (none of which were included in the deferred tax assets recognizedcolumns labeled “As Reported” in the tables below.

Select line items from the condensed consolidated balance sheet as of December 31, 2016) have been attributed to tax deduction for stock-based compensation expense in excessJune 30, 2018 that reflect the adoption of the related book expense. Under the new standard these previously unrecognized deferred tax assets were recognizedare as follows:

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Select line items from the condensed consolidated statement of cash flows for the six months ended June 30, 2018 that reflect the adoption of the new standard are as follows:

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

The updated stock-based compensation expenseCompany determines revenue recognition through the following steps, which are described in more detail below:

The Company’s agreements with customers often include multiple support subscription and/or professional services elements, and income tax accounting policiesthese elements are as follows:sometimes included in separate contracts. The Company considers an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition.

Stock-Based Compensation ExpenseAt contract inception, the Company assesses the support and services product offerings or bundle of product offerings in its contracts to identify performance obligations that are distinct. A performance obligation is distinct when it is separately identifiable from other items in a bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. To identify its performance obligations, the Company considers all of the product offerings promised in the contract. The Company has concluded that its contracts with customers do not contain warranties that give rise to a separate performance obligation.

The Company recognizes compensation costs relatedworks with partners in various capacities to employee stock options, time-based restricted stock units (“RSUs”), PSUsboth identifyend-users for their product offerings and participationto provide those product offerings toend-users. The Company determines whether it is responsible for providing the actual product or service as a principal, or for arranging for the product or service to be provided by the third-party as an agent. Judgment is applied to determine whether the Company is the principal or the agent by evaluating whether the Company has control of the product or service prior to it being transferred to the customer. The principal versus agent assessment is performed at the performance obligation level. Indicators that the Company considers to support that it has control include whether the Company is primarily responsible for fulfilling the promise to provide the specified product or service to the customer and the Company has discretion in establishing the price the customer ultimately pays for the product or service. Depending upon the level of the Company’s 2014 Employee Stock Purchase Plan, as amended (“ESPP”),contractual responsibilities and obligations for delivering solutions to end customers, the Company has arrangements where the Company is the principal and recognizes the gross amount invoiced to the customer and other arrangements where the Company is an agent and recognizes the net amount retained.

The transaction price is the total amount of consideration the Company expects to be entitled to in exchange for the product offerings in a contract. Sales,value-add and other taxes the Company collects from customers concurrent with revenue-producing activities are excluded from revenue. Some of the Company’s contracts with customers contain variable consideration. Variable consideration exists when the amount which the Company expects to receive in a contract is based on the estimated fair value on the dateoccurrence ornon-occurrence of grant.future events, such as professional services invoiced upon substantive acceptance of milestones. The Company estimates the grant date fair value of optionsvariable consideration in its contracts primarily using the Black-Scholes option pricing model.expected value method. In some contracts, the Company applies the most likely amount method by considering the single most likely amount in a limited range of possible consideration amounts. The Company develops estimates of variable consideration on the grant date fair valuebasis of RSUsboth historical information and PSUscurrent trends. Variable consideration is constrained and not included in the transaction price when the Company believes a significant cumulative revenue reversal is probable. In determining if a significant revenue reversal is probable, the Company considers the amount of revenue recognized in advance of the occurrence ornon-occurrence of future events that causes invoicing to be contingent, the expected timing of the occurrence ornon-occurrence of future events and the likelihood of a reversal. For example, in a professional services contract when a portion of the fee is subject to a substantive acceptance provision, the Company evaluates historical acceptance rates for similar contracts, customer specific level of risk, and the time between delivery and acceptance when estimating and constraining variable consideration.

Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the product(s) or service(s) to the customer (the “allocation objective”). If the allocation objective is met at contractual prices, no allocations are performed. Otherwise, the Company allocates the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis, except when the criteria are met for allocating variable consideration or a discount to one or more, but not all, performance obligations in the contract. The Company allocates variable consideration to one or more, but not all

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

performance obligations when the terms of the variable payment relate specifically to the Company’s efforts to satisfy the performance obligation (or transfer the distinct product or service) and when such allocation is consistent with the allocation objective when considering all performance obligations in the contract (e.g., a time and materials based professional services arrangement bundled with support subscription). Determining whether the criteria for allocating variable consideration to one or more, but not all, performance obligations in the contract requires significant judgment and may affect the timing and amount of revenue recognized. The Company does not typically meet the requirements to allocate discounts to one or more, but not all, performance obligations in a contract.

In order to determine the stand-alone selling price, the Company conducts a periodic analysis to determine if there is an observable stand-alone selling price. To have observable pricing, the Company requires that a substantial majority of the stand-alone selling prices for a product offering fall within a pricing range. If a directly observable stand-alone selling price does not exist, the Company estimates a stand-alone selling price range by reviewing external and internal market factors including, but not limited to, pricing practices including historical discounting, major service groups and geographic considerations. There is also no hierarchy for how to estimate or otherwise determine the stand-alone selling price for product offerings that are not market-based usingsold separately, however, the closing marketCompany maximizes the use of observable data.

Selling prices are periodically analyzed to identify significant changes and if so, stand-alone selling prices are updated accordingly. The Company’s process for determining stand-alone selling price requires judgment and considers multiple factors that are reasonably available and maximizes the use of observable inputs that may vary over time depending upon the unique facts and circumstances related to each performance obligation. The Company believes that this method results in an estimate that represents the price the Company would charge for the product offerings if they were sold separately.

With stand-alone selling price established as a range, if the contractually stated prices of the underlying performance obligation fall within the stand-alone selling price range, the Company will use the contractually stated price to allocate the transaction price. If the contractually stated price for one or more performance obligations in a contract fall outside of the stand-alone selling price range, the Company will use themid-point of the stand-alone selling price range to allocate the transaction price on a relative stand-alone selling price basis.

Revenues are recognized when the Company satisfies the performance obligations under the terms of a contract when control over the Company’s product offerings is transferred, which generally occurs as support subscription and professional services are delivered to the customer. Previously, under the guidance in effect prior to the adoption of the new standard, revenue was recognized when all of the following criteria were met: (i) persuasive evidence of an arrangement exists, (ii) services have been delivered, (iii) the arrangement fee is fixed or determinable and (iv) collectability is probable. The Company’s multiple element arrangements generally include support subscription combined with professional services. The Company had not established vendor specific objective evidence of fair value (“VSOE”) for its support subscriptions and professional services offerings, and the Company recognized revenue on a ratable basis over the period beginning when both the support subscription and professional services had substantially commenced, and ended at the conclusion of the support subscription or professional services period, whichever is longer. Under the Company’s multiple element arrangements, the support subscription element generally has the longest service period and the professional services element is performed during the earlier part of the support subscription period.

The following describes the nature of the Company’s common stockprimary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions the Company enters into with its customers.

Support Subscription Revenue

As part of a support subscription, the Company stands ready to help customers resolve technical issues related to the installed platform. The support subscriptions are designed to assist throughout a customer’s lifecycle from development toproof-of-concept, to quality assurance and testing, to production and development. Support subscription is generally offered under renewable, fixed fee contracts where payments are typically due annually in advance and may have a term of one year or multiple years. The contracts generally do not contain refund provisions for fees earned related to support services performed. A support subscription is viewed as a stand-ready performance obligation comprised of a series of distinct days of service that is satisfied ratably over time as the services are provided. A time-elapsed output method is used to measure progress because the Company’s efforts are expended evenly throughout the period given the nature of the promise is a stand-ready service. Unearned support subscription revenue is included in deferred revenue and other contract liabilities. On occasion, the Company may sell engineering services and/or a premium subscription agreement that provides a customer with development input and the opportunity to work more closely with its developers.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Professional Services Revenue

Professional services revenue is derived primarily from customer fees for consulting services engagements and education services. The Company’s consulting services are provided primarily on a time and materials basis and, to a lesser extent, a fixed fee basis, and education services are generally priced based on attendance. Time and material contracts are generally invoiced based upon hours incurred on a monthly basis and fixed fee contracts may be invoicedup-front or as milestones are achieved throughout the project. Professional services revenue is typically recognized over time as the services are rendered. Depending on the grant date.nature of the consulting services engagement (e.g., time and materials basis, fixed fee basis, etc.), various measures of progress may be used to recognize revenue. These measures of progress include recognizing revenue in an amount equal to and at the time of invoicing, a measure of time incurred relative to remaining hours expected to be delivered, or other similar measures. These measures depict the Company’s efforts to satisfy professional services contracts and therefore reflect the transfer of control for the services to a customer.

Contract Costs

Contract costs, consisting primarily of sales commissions and payroll taxes, that are incremental to obtaining a contract with a customer are capitalized and recorded as deferred costs. The Company estimatesexpects to recover deferred contract costs over the grant date fair valueperiod of market-based PSUsbenefit from the underlying contracts. The amortization period for recovery is consistent withpre-established market conditions using the Monte Carlo valuation model. The Company estimates fair valuetiming of each ESPP purchase attransfer to the beginningcustomer of services to which the offering period using the Black-Scholes option pricing model. The respective grant date fair valuescapitalized costs relate. Contract costs that relate to an underlying transaction are expensed commensurate with recognition of stock options, restricted stock, RSUs, PSUsrevenue as performance obligations are satisfied. Contract costs that are incurred in excess of those relating to an underlying transaction are not considered commensurate with recognition of revenue as performance obligations are satisfied, and each ESPP purchase are recognizedamortized on a straight-line basis over the requisite service periods, which correspondanticipated average customer life of five years. Under the guidance in effect prior to the vesting periods.

adoption of the new standard, the Company previously expensed these costs as incurred. Contract costs were $52.0 million as of June 30, 2018. For the three and six months ended June 30, 2018, amortization expense for the contract costs were $8.3 million and $15.4 million, respectively, and there was no impairment loss in relation to the costs capitalized. The Company recognizes compensationdoes not incur direct fulfillment-related costs relatedof a nature required to restricted stock grantedbe capitalized and amortized.

Deferred Revenue and Contingent Revenue

Deferred revenue consists of amounts invoiced to customers but not yet recognized as revenue. The Company records revenue and a corresponding contract asset when consideration allocated to a transferred product offering is more than the amount billable to customers in connection with an acquisition based upon the fair market valuecurrent period. Under the guidance in effect prior to the adoption of the underlying sharesnew standard, the Company previously limited the amount of common stock.

The Company accountsrevenue recognized for stock options and RSUs issueddelivered elements to non-employees basedthe amount that was not contingent on the fair valuefuture delivery of product offerings, or subject to the Company’s future performance obligations.

Contract Assets

Contract assets consist of the awards as determined usingright to consideration in exchange for product offerings that the Black-Scholes option pricing modelCompany has transferred to a customer when that right is conditional and is not only subject to the closing market pricepassage of time (e.g., performance prior to invoicing on fixed fee professional service arrangements with substantive acceptance). When the Company’s common stock, respectively. The fair valueCompany has unconditional rights to consideration, except for the passage of stock options and RSUs grantedto non-employees arere-measured each period as the stock options and RSUs vest, and the resulting change in value, if any, is recognized intime, a receivable will be recorded on the condensed consolidated statements of operations during the period the related services are performed.balance sheets. The Company does not typically include extended payment terms in its contracts with customers.

PSUs allow the recipients of such awardsContract Liabilities

Contract liabilities represent an obligation to earn fully vested shares of the Company’s common stock upon the achievementof pre-established performance objectives. For PSUs that are not market-based, stock-based compensation expense is recognized when the performance objective is expected to be achieved. On a quarterly basis,transfer product offerings for which the Company evaluates the performance criteria attainmenthas received consideration, or for these PSUs. The cumulative effect on current and prior periodswhich an amount of a change in the estimated number of PSUs expected to be earnedconsideration is recognized as compensation expense or as a reduction of previously recognized compensation expense in the period of the revised estimate. For market-based PSUs, stock-based compensation expense is recognized over a “derived” service period. The derived service period is inferreddue from the Monte Carlo valuation modelcustomer (e.g., support subscription arrangements where consideration is paid annually in advance). Contract liabilities are comprised of short-term and maylong-term deferred revenue and other contract liabilities. The Company’s contract balances will be shorterreported in duration than the performance period for a particular market-based PSU award. If the PSU award vests asnet contract asset or liability position on a result of market performance of the Company’s common stock prior tocontract-by-contract basis at the end of the derived service period, the compensation expense related to the vested award that had not previously been recognized would be recognized upon vesting.

Income Taxes

The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, for any portion of deferred income tax assets where it is considered more likely than not that it will not be realized.

The tax effects of the Company’s income tax positions are recognized only if determined “more likely than not” to be sustained based solely on the technical merits as of theeach reporting date. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

The Company accounts for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and recognizes previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting.period.

Other than the changes to the Company’s stock-based compensation expense and income taxes accountingabove policies, there have been no other material changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 20162017 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

2. FAIR VALUE MEASUREMENTS

The following table summarizes the investments inavailable-for-sale securities (in thousands):

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

The following table sets forth the fair value of the Company’s financial assets measured on a recurring basis by level within the fair value hierarchy (in thousands):

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

3. INTANGIBLE ASSETS, NET

The following table summarizes the Company’s intangible assets, net (in thousands):

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

On April 13, 2017, a derivative action was filed in the Court of Chancery of the State of Delaware, captionedSteinberg v. Bearden, et al., Case No.2017-0286-AGB, purportedly filed by a Hortonworks shareholder on behalf of the Company against certain of the Company’s directors and executive officers. The derivative complaint alleges that the defendants breached their fiduciary duties to the Company and allegedly made false or misleading statements regarding the Company’s business and operations. The derivative action includes claims for, among other things, unspecified damages in favor of the Company, corporate actions to purportedly improve the Company’s corporate governance, and an award of costs and expenses to the derivative plaintiffs, including attorneys’ fees. On July 3, 2017, defendants filed aMay 30, 2018, the court granted defendants’ motion to dismiss the complaint. Because the action is in the early stages of the litigation process, the Company is unable to assess whether any loss or adverse effect on its financial condition is probable or remote or to estimate the range of potential loss, if any.with prejudice.

5. DEBT

Amended and Restated Revolving Credit Agreement

TheOn November 2, 2016, the Company entered into a $30.0 million senior secured revolving credit facility (the “Original Credit Agreement”) with Silicon Valley Bank (the “Bank”), and on November 1, 2017, the Company amended its Original Credit Agreement to increase its borrowing capacity to $50.0 million, documented as an amendment and restatement of itstwo-year senior secured revolving credit agreement with Silicon Valley Bank (the “Bank”) on November 2, 2016 and amended such agreement on June 26, 2017 and September 22, 2017facility (as amended and restated, the “Credit“Amended and Restated Credit Agreement”). Amounts outstanding under the Amended and Restated Credit Agreement are payable on or before November 2, 20181, 2020 and will accrue interest per annum at a rate equal to the Bank’s prime rateLondon Interbank Offered Rate plus 0.503.50 percent. Any outstanding loans drawn under the Credit Agreement may be paid at any time prior to maturity. Pursuant to the terms of the Amended and Restated Credit Agreement, the Company agreed to pay an annual facility fee equal to 0.50 percent of the aggregate amount of the revolving credit facility commitments and an unused line fee of 0.350.45 percent per annum on the unused commitments. The Credit Agreement currently has no subsidiary guarantors.

The Credit Agreement contains customary reporting, affirmative and negative covenants, including negative covenants imposing limitations on, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, grant liens, consummate asset sales, make certain investments and declare or make dividends or repurchase its stock. It also contains certain financial covenants that require the Company to maintain a minimum trailing consolidated adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) and a minimum adjusted quick ratio. In addition, the Company is required to maintain a balance of at least $10.0$15.0 million on account with the Bank. The Amended and Restated Credit Facility currently has no subsidiary guarantors.

The Amended and Restated Credit Agreement contains customary negative covenants and certain financial covenants that require the Company to maintain a minimum trailing12-monthnon-GAAP operating profit and a minimum adjusted quick ratio.

As of SeptemberJune 30, 2017,2018, the Company had no borrowings outstanding under the Amended and Restated Credit Agreement and was in compliance with all financial covenants.

6. STOCKHOLDERS’ EQUITY (DEFICIT) EQUITY

Common Stock

Each share of common stock is entitled to one vote for matters to be voted on by the stockholders of the Company. The holders of common stock are also entitled to receive dividends whenever declared by the Board of Directors from legally available funds. The Company has not paid a dividend since its inception, and has no current plans to do so.

2011 Stock Option and Grant Plan

In December 2014, in connection with the closing of the Company’s IPO, the Hortonworks, Inc. 2011 Stock Option and Grant Plan, as amended (the “2011 Plan”), was terminated as to future grants and shares authorized for issuance under the 2011 Plan were canceled (except for those shares reserved for issuance upon exercise of outstanding stock options). As of SeptemberJune 30, 2017,2018, options to purchase 4,743,0193,325,732 shares of common stock were outstanding under the 2011 Plan pursuant to their original terms and no shares were available for future grant.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

2014 Stock Option and Incentive Plan

The Hortonworks, Inc. 2014 Stock Option and Incentive Plan (the “2014 Plan”) was adopted by the Company’s Board of Directors in September 2014. The 2014 Plan was approved by the Company’s stockholders in November 2014 and became effective immediately prior to the closing of the Company’s IPO. All remaining shares that had been available infor issuance but not covered by outstanding awards under the 2011 Plan rolled into the 2014 Plan following the consummation of the IPO. The 2014 Plan allows the plan administrator to make equity-based incentive awards to the Company’s full or part-time officers, employees,non-employee directors and consultants. An amendment and restatement of the 2014 Plan (the “Amended 2014 Plan”) to increase the number of shares reserved for issuance, among other things, was approved by the Board of Directors in April 2016 and by the Company’s stockholders in May 2016. The Amended 2014 Plan allows the Compensation Committee to make equity-based incentive awards

HORTONWORKS, INC.

Notes to the Company’s full or part-time officers, employees,non-employee directors and consultants.Condensed Consolidated Financial Statements

(Unaudited)

The Company initially reserved 6,000,000 shares of the Company’s common stock for the issuance of awards under the 2014 Plan, plusPlan. This was in addition to the 923,732 shares of the Company’s common stock that remained available for issuance under the Company’s 2011 Plan as of the Company’s IPO date. The amendmentdate and restatement ofthat rolled into the 2014 Plan increased the number of shares reserved for issuance under the Amended 2014 Plan by 7,000,000 shares.Plan. The Amended 2014 Plan also provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2015, by five percent of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s Compensation Committee.plan administrator. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The amendment and restatement of the 2014 Plan increased the number of shares reserved for issuance under the Amended 2014 Plan by 7,000,000 shares.

In April, June and July 2015, under the 2014 Plan, the Company granted an aggregate of 421,484 PSUsperformance-based restricted stock units (“PSUs”) to certain executive and senior officers (the “Grantees”) that vest upon (a) the achievement of specified performance targets as set by the Compensation Committee and (b) the Grantee remaining employed during the respective performance cycles over a service period of up to three years, with such service periods commencing on July 1, 2015. The performance target value for each performance cycle is based on an average of the applicable internal and external billings amounts for the respective performance cycle. The number of PSUs that vest for a given performance cycle is based on the Company’s achievement of actual billings relative to the performance target value.

In October 2015, under the 2014 Plan, the Company granted an aggregate of 266,084 PSUs to the Grantees that vest upon (a) the achievement of specified performance targets as set by the Compensation Committee and (b) the Grantee remaining employed for the duration of therespective12-month performance performance cycles over a service period of up to two years, with such service periods commencing on January 1, 2016. The number of PSUs that vest for a given performance cycle is based on the Company’s achievement of EBITDAearnings before interest, taxes, depreciation and amortization growth and revenue growth relative to the linear ranking ofapre-selected group group of the Company’s peers.

In September 2017, under the Amended 2014 Plan, the Company granted 714,711 market-based PSUs to ourthe Company’s Chief Executive Officer that vest upon (a) the achievement of a specific market-based performance goal related to the price of ourthe Company’s common stock over forty consecutive trading days during a performance cycle of four years, with such performance cycle commencing on September 10, 2017 and (b) the Chief Executive Officer remaining employed through achievement of the performance goal. If the Company achieves the performance goal within the performance cycle, and the Chief Executive Officer remains employed through such achievement, 100 percent of the PSUs will vest.vest upon achievement of the market-based performance goal.

As of SeptemberJune 30, 2017,2018, options to purchase shares of stock, RSUsrestricted stock units (“RSUs”) and PSUs covering an aggregate of 13,251,58611,105,286 shares of common stock were outstanding under the Amended 2014 Plan.

On January 1, 2017,2018, the shares reserved for issuance under the Amended 2014 Plan was increased by 3,071,470, resulting in 22,579,224 total3,637,815 shares. As of June 30, 2018, there were 26,292,197 shares reserved for issuance under the Amended 2014 Plan, as of September 30, 2017, of which 900,394780,868 shares remained available for issuance.

2014 Employee Stock Purchase Plan

The Company’s ESPP was adopted and approved by the Company’s Board of Directors in September 2014, was adopted and approved by the Company’s stockholders in November 2014, and was amended in August 2015 to allow employees of certain of the Company’snon-U.S. subsidiaries to participate in the ESPP. The ESPP reservesinitially reserved and authorizesauthorized the issuance of up to a total of 2,500,000 shares of common stock to participating employees. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2015, by the lesser of (i) 1,000,000 shares of common stock, (ii) one percent of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31, or (iii) such lesser number of shares as determined by the ESPP administrator. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. On January 1, 2017,2018, the shares reserved for issuance under the ESPP was increased by 614,294 resulting in total727,563 shares. As of June 30, 2018, there were 4,734,330 shares reserved for issuance under the ESPP, of 4,006,767 as of September 30, 2017, of which 1,933,3432,236,022 remained available for purchase.

HORTONWORKS, INC.

Notes to the Condensed Consolidated Financial Statements