Imperva 8K/A Financial Statements and Exhibits | SEC 23 Oct 18

Exhibit 99.3

IMPERVA, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined balance sheet as of June 30, 2018 and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and six months ended June 30, 2018, are based on the historical financial statements of Imperva, Inc. (“Imperva”, “we”, “our”) and Prevoty, Inc. (“Prevoty”) after giving effect to the acquisition of Prevoty (“Acquisition”) and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and six months ended June 30, 2018 give effect to the Acquisition as if it had occurred on January 1, 2017.

The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the Acquisition as if it had occurred on June 30, 2018. The Acquisition was completed on August 9, 2018.

The Acquisition has been accounted for pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The total estimated consideration to be transferred, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible assets and intangible assets of Prevoty acquired in connection with the acquisition, based on their estimated fair values as of the date of the acquisition, and the excess is allocated to goodwill. Imperva has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. We have made significant assumptions and estimates in determining the preliminary estimated purchase price and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change during the estimated purchase price allocation period (generally one year from the acquisition date) as we finalize the valuations of the net intangible assets. The final valuations of identifiable intangible assets and associated tax effects may change significantly from our preliminary estimates. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial statements.

The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results.

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated results of operations or financial position of Imperva that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of Imperva. The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings that Imperva may achieve, or any additional expenses that it may incur, with respect to the combined companies.

The unaudited pro forma condensed combined financial statements, including the notes thereto should be read in conjunction with:

•	The accompanying notes to the unaudited pro forma condensed combined financial statements;

•	Our audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2018;

•	Our unaudited condensed consolidated interim financial statements as of and for the six months ended June 30, 2018, included in our Quarterly Report on Form 10-Q filed with the SEC on August 3, 2018;

•	Prevoty’s audited consolidated financial statements as of and for the year ended December 31, 2017, included in Exhibit 99.1; and

•	Prevoty’s unaudited condensed consolidated interim financial statements as of and for the six months ended June 30, 2018, included in Exhibit 99.2.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of June 30, 2018

(In thousands)

		Historical
		Imperva, Inc.				Prevoty, Inc. (Note 1)				Pro forma adjustments			Note 2		Pro forma combined
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$		209,194		$		9,883		$		(2,785	)	A	$		216,292
Short-term investments			185,278			–					(129,367	)	A			55,911
Restricted cash			30			–				–						30
Accounts receivable, net			70,307				1,611			–						71,918
Deferred costs, current			5,765			–				–						5,765
Inventory			196			–				–						196
Prepaid expenses and other current assets			12,975				429			–						13,404
Total current assets			483,745				11,923				(132,152	)				363,516
Property and equipment, net			22,740				64			–						22,804
Goodwill			36,389			–					111,621		B			148,010
Intangible assets, net			2,920			–					12,100		C			15,020
Severance pay fund			5,950			–				–						5,950
Restricted cash			2,334			–				–						2,334
Deferred tax assets			1,017			–				–						1,017
Other assets			19,393				106				(89	)	D			19,410
TOTAL ASSETS	$		574,488		$		12,093		$		(8,520	)		$		578,061
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$		5,139		$		184		$	–				$		5,323
Income taxes			10,015			–				–						10,015
Accrued compensation and benefits			22,668				314			–						22,982
Accrued and other current liabilities			13,970				253				1,104		E			15,327
Related-party note payable		–					3,576				(3,576	)	F		–
Deferred revenue, current			128,519				4,558				(3,354	)	G			129,723
Total current liabilities			180,311				8,885				(5,826	)				183,370
Accrued severance pay			7,346			–				–						7,346
Other non-current liabilities			12,264			–				–						12,264
Deferred revenue			46,132				4,378				(3,353	)	G			47,157
TOTAL LIABILITIES			246,053				13,263				(9,179	)				250,137
STOCKHOLDERS' EQUITY:
Preferred stock		–					2				(2	)	H		–
Common stock			3				1				(1	)	H			3
Additional paid-in capital			601,298				24,644				(24,080	)	I			601,862
Accumulated deficit			(269,904	)			(25,817	)			24,742		J			(270,979	)
Accumulated other comprehensive loss			(2,962	)		–				–						(2,962	)
TOTAL STOCKHOLDERS' EQUITY			328,435				(1,170	)			659					327,924
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$		574,488		$		12,093		$		(8,520	)		$		578,061

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

(in thousands, except per share amounts)

		Historical
		Imperva, Inc.				Prevoty, Inc.				Pro forma adjustments			Note 3		Pro forma combined
Net revenue
Products and license	$		97,122		$		1,807		$	–				$		98,929
Services			224,594				1,818				(474	)	K			225,938
Total net revenue			321,716				3,625				(474	)				324,867
Cost of revenue
Products and license			7,738				211				(111	)	M			7,838
Services			56,215				704				533		N			57,452
Total cost of revenue			63,953				915				422					65,290
Gross Profit			257,763				2,710				(896	)				259,577
Operating expenses:
Research and development			63,452				1,468				3,758		N			68,678
Sales and marketing			152,178				2,829				1,241		N			156,248
General and administrative			54,435				2,490				3,208		N		60,133
Restructuring charges			667			–				–						667
Amortization of acquired intangible assets			714			–					3,542		O			4,256
Total operating expenses			271,446				6,787				11,749					289,982
Loss from operations			(13,683	)			(4,077	)			(12,645	)				(30,405	)
Gain on sale of business			35,871			–				–						35,871
Other income (expense), net			1,142				(145	)			40		P			1,037
Income (loss) before provision for income taxes			23,330				(4,222	)			(12,605	)				6,503
Provision for income taxes			461			–				–						461
Net income (loss)	$		22,869		$		(4,222	)	$		(12,605	)		$		6,042
Earnings per share
Basic	$		0.68											$		0.18
Diluted	$		0.67											$		0.18
Shares used in computing earnings per share
Basic			33,724													33,724
Diluted			34,238													34,238

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(in thousands, except per share amounts)

		Historical
		Imperva, Inc.				Prevoty, Inc.				Pro forma adjustments			Note 3		Pro forma combined
Net revenue
Products and license	$		39,730		$		1,106		$		2,853		L	$		43,689
Services			129,314				1,125				(551	)	K,L			129,888
Total net revenue			169,044				2,231				2,302					173,577
Cost of revenue
Products and license			3,638				166				(67	)	M			3,737
Services			32,637				121				195		N			32,953
Total cost of revenue			36,275				287				128					36,690
Gross Profit			132,769				1,944				2,174					136,887
Operating expenses:
Research and development			37,601				1,312				1,813		N			40,726
Sales and marketing			80,047				3,062				203		L,N			83,312
General and administrative			27,917				826				1,785		N,Q			30,528
Restructuring charges			2,551			–				–						2,551
Amortization of acquired intangible assets			264			–					1,771		O			2,035
Total operating expenses			148,380				5,200				5,572					159,152
Loss from operations			(15,611	)			(3,256	)			(3,398	)				(22,265	)
Other income (expense), net			1,949				(37	)			37		P			1,949
Income (loss) before provision for income taxes			(13,662	)			(3,293	)			(3,361	)				(20,316	)
Provision for income taxes			19,178			–				–						19,178
Net income (loss)	$		(32,840	)	$		(3,293	)	$		(3,361	)		$		(39,494	)
Earnings per share
Basic	$		(0.95	)										$		(1.14	)
Diluted	$		(0.95	)										$		(1.14	)
Shares used in computing earnings per share
Basic			34,638													34,638
Diluted			34,638													34,638

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information

Note 1: Basis of Pro Forma Presentation

Accounting Periods Presented

The unaudited pro forma condensed combined balance sheet as of June 30, 2018 is presented as if the Acquisition had occurred on June 30, 2018.

The unaudited pro forma condensed combined statements of operations of Imperva and Prevoty for the year ended December 31, 2017 and six months ended on June 30, 2018 are presented as if the Prevoty acquisition had taken place on January 1, 2017.

Preliminary Purchase Consideration

For purposes of the pro forma financial information, the following table presents the components of the purchase consideration.

The purchase consideration reflects the payment of cash consideration of $132.2 million, subject to a finalized working capital adjustment, including cash transferred to selling shareholders and repayment of Prevoty’s historical related-party note payable which was accelerated on the closing of the transaction. Additionally, there is a cash payment of approximately $17.7 million required for certain shares of Prevoty common stock which are subject to forfeiture based upon time-based vesting and continuing employment, and were therefore excluded from purchase consideration. Such amounts will be recognized as compensation expense post-acquisition over the vesting period.

In connection with the Acquisition, certain Prevoty stock options that were outstanding, unexercised and unvested were assumed and converted into options to purchase Imperva common stock. Separately, certain Prevoty stock options were cancelled and Imperva granted these individuals restricted stock units as a result of the cancelled options. The amounts included in consideration transferred are amounts attributable to services rendered prior to the closing date.


		(in thousands)
Cash consideration	$	132,152
Fair value of equity awards		564
Assumed liability		100
Total purchase consideration	$	132,816

Preliminary Purchase Consideration Allocation

The following represents the preliminary allocation of the fair value of the purchase consideration to the acquired assets and assumed liabilities based on Prevoty’s balance sheet as of June 30, 2018, and is for illustrative purposes only.


		(in thousands)
Net tangible assets	$	9,095
Intangible assets
Developed technology		9,500
Customer relationships		1,800
Trade name and other		800
Goodwill		111,621
Total purchase consideration	$	132,816

Goodwill of approximately $111.6 million represents the excess of the purchase consideration over the fair value of the net tangible and intangible assets acquired. Goodwill is primarily attributable to expected post-acquisition synergies from integrating Prevoty’s technology into Imperva’s cyber security solutions. None of the goodwill recorded as part of the Prevoty acquisition will be deductible for U.S. federal income tax purposes.

The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their preliminary estimated useful lives as of the date of acquisition:


Intangible asset		Preliminary fair value	Estimated useful life (in years)
Developed technology	$	9,500	4
Customer relationships		1,800	2
Trade name and other		800	3
Total	$	12,100

The preliminary estimated fair value of Prevoty’s security solutions technology is $9.5 million. The preliminary estimated fair value of the underlying relationships with Prevoty customers is $1.8 million and the preliminary estimate of Prevoty’s trade name and other was $0.8 million. These preliminary estimates of fair value and weighted-average useful life could differ from the final purchase consideration allocation. For each 10% change in the fair value of identifiable intangible assets, there could be an annual change in amortization expense—increase or decrease—of approximately $300 thousand, assuming a weighted-average useful life of 3.6 years.

Prior to the acquisition, Prevoty had a net deferred tax asset position and Prevoty continues to be in a net deferred tax asset position, after adjustments for deferred tax liability of $5.6 million related to purchase accounting adjustments, and the net deferred tax asset is subject to a full valuation allowance. Imperva’s U.S. net deferred tax asset was also subject to a full valuation allowance. Therefore, the combined U.S. deferred tax asset position remains unchanged. As such, the unaudited pro forma condensed combined financial information do not include adjustments for tax-related items.

Accounting Policies

Imperva adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”) on January 1, 2018, utilizing the modified retrospective transition method whereas Prevoty, as a private company, had not adopted ASC 606. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to ASC 606 and Subtopic 340-40 as the “new standard”.

Under the previous guidance, the entire transaction fee of certain software arrangements was recognized ratably in revenue over the performance period; however, the new standard requires revenue recognition of a portion of the transaction price allocated to the functional license delivered at the inception of certain contractual arrangements. The pro forma adjustments reflect application of Prevoty’s adoption of the new standard.

Additionally, Prevoty had historically recognized commission expenses as incurred whereas Imperva capitalizes contract origination costs that are incremental and recoverable costs of obtaining a contract with a customer under the new standard. These costs are deferred and amortized over the applicable benefit period. The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2018 has been adjusted for Prevoty’s adoption of the new standard. The unaudited pro forma condensed combined balance sheet as of June 30, 2018 has not been adjusted for the deferred costs as Imperva would not recognize deferred costs as part of purchase accounting as they do not meet the definition of an identifiable asset under ASC 805.

Reclassifications

Prevoty had historically presented accounts payable and accrued expenses of $0.7 million as of June 30, 2018 as a single line item. The pro forma balance sheet was adjusted to conform Prevoty’s presentation to Imperva’s presentation as follows:

To include $0.2 million in accounts payable

To include $0.3 million in accrued compensation and benefits

To include $0.2 million in accrued and other current liabilities

Note 2: Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet are as follows:

To record the cash portion of the purchase consideration which was funded from cash and cash equivalents and from sale of short-term investments.

To record goodwill.

To record the estimated preliminary fair value of Prevoty’s identifiable intangible assets.

To eliminate Prevoty's historical capitalized internally-developed software cost as any value attributable to internally-developed software was considered as part of the fair value of technology-related intangible asset.

To record adjustment to accrued and other current liabilities as follows:


		(in thousands)
To eliminate Prevoty’s historical deferred rent	$	(14)
To eliminate historical common stock warrant liability of Prevoty that was extinguished prior to the closing date		(57)
To record assumed liability included in consideration transferred		100
To accrue Imperva's transaction-related expenses not reflected in historical financial statements		1,075
Total adjustment	$	1,104

To eliminate Prevoty's related-party note payable and accrued interest which were paid at closing.

To record adjustment to current and noncurrent deferred revenue as follows:


		Deferred revenue, current		Deferred revenue, noncurrent
		(in thousands)
To reduce Prevoty’s historical deferred revenue for our initial assessment of the impact of ASC 606 adoption for Prevoty	$	(2,880)	$	(2,949)
To reflect a fair value adjustment		(474)		(404)
Total adjustment	$	(3,354)	$	(3,353)

The current deferred revenue balance for Prevoty includes customer deposits of $0.5 million, related to cancellable and refundable license and maintenance fees which were billed in advance.

To eliminate Prevoty’s historical equity.

To reflect an adjustment to additional paid-in capital as follows:


		(In thousands)
To eliminate Prevoty’s historical equity	$	(24,644)
To reflect amounts attributable to pre-combination service for assumed Prevoty awards included in consideration transferred		564
Total adjustment	$	(24,080)

To record adjustments to accumulated deficit as follows


		(In thousands)
To eliminate Prevoty’s historical equity	$	25,817
To reflect Imperva's acquisition-related transaction costs not reflected in the historical financial statements		(1,075)
Total adjustment	$	24,742

Note 3: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

To record a reduction in revenues related to the estimated fair value of the acquired deferred revenue and the customer liability. The fair value adjustment is the difference between the preliminary fair values of acquired deferred revenues and the historical carrying amounts of Prevoty’s deferred revenues.

To record impact of adoption of the new standard on Prevoty's statement of operations for the six months ended June 30, 2018 and Imperva had adopted new standard on January 1, 2018.

Revenues: Prevoty’s historical product and service revenue have been adjusted to reflect the impact of the adoption of the new standard for the six months ended on June 30, 2018.

ii.

Other: Prevoty's cost to obtain customer contracts has been adjusted to reflect the adoption of the new standard for the six months ended on June 30, 2018.

To eliminate Prevoty's historical amortization of internally developed-software costs as fair value attributed to Prevoty's technology was considered in the fair value of the technology-related intangible asset.

To record the incremental stock-based compensation expense related to the Prevoty share-based awards assumed as part of the acquisition using the straight-line amortization method over the remaining vesting periods, offset by Prevoty’s historical expense. The adjustment is as follows (in thousands):


		Year ended December 31, 2017
		Eliminate Historical Prevoty		Record Replacement Awards		Increase
Cost of revenue - Services	$	–	$	533	$	533
Research and development		(8)		3,766		3,758
Sales and marketing		(10)		1,251		1,241
General and administrative		–		3,208		3,208
Total	$	(18)	$	8,758	$	8,740


		Six months ended June 30, 2018
		Eliminate Historical Prevoty		Record Replacement Awards		Increase
Cost of revenue - Services	$	(2)	$	197	$	195
Research and development		(62)		1,875		1,813
Sales and marketing		(27)		428		401
General and administrative		(58)		1,603		1,545
Total	$	(149)	$	4,103	$	3,954

To record amortization of Prevoty’s intangible assets using the straight-line method based on the estimated useful lives assigned.

To eliminate Prevoty's historical interest expense as the related-party note payable was paid off at closing of the Acquisition.

To eliminate historical acquisition-related transaction costs of $0.2 million that were reflected in the historical condensed statement of operations for the six months ended June 30, 2018.

Note 4: Pro Forma Net Loss Per Share

The pro forma combined basic and diluted net loss per share are based on the number of Imperva shares of common stock used in computing basic and diluted net loss per share. Dilutive potential common shares are included only if they have a dilutive effect on earnings per share. No adjustment has been made for the assumed Prevoty equity awards in the computation of pro forma combined diluted net loss per share since their effect would be anti-dilutive or not material.

Imperva Inactive 8-K/AFinancial Statements and Exhibits