Q2 HOLDINGS, INC., 10-K filed on 2/16/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Jan. 31, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Entity Registrant Name
Q2 Holdings, Inc. 
 
 
Entity Central Index Key
0001410384 
 
 
Trading Symbol
qtwo 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock Shares Outstanding
 
42,028,275 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 1,225,118,154 
Consolidated Balance Sheets (USD $)
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 57,961,000 
$ 54,873,000 
Restricted cash
2,315,000 
1,315,000 
Investments
41,685,000 
42,249,000 
Accounts receivable, net
13,203,000 
12,240,000 
Prepaid expenses and other current assets
3,115,000 
3,215,000 
Deferred solution and other costs, current portion
9,246,000 
8,839,000 
Deferred implementation costs, current portion
3,562,000 
2,938,000 
Total current assets
131,087,000 
125,669,000 
Property and equipment, net
34,544,000 
27,480,000 
Deferred solution and other costs, net of current portion
12,973,000 
11,125,000 
Deferred implementation costs, net of current portion
8,295,000 
8,096,000 
Intangible assets, net
12,034,000 
15,208,000 
Goodwill
12,900,000 
12,900,000 
Other long-term assets
1,006,000 
526,000 
Total assets
212,815,000 
200,980,000 
Current liabilities:
 
 
Accounts payable
7,621,000 
4,231,000 
Accrued liabilities
10,562,000 
8,822,000 
Accrued compensation
11,511,000 
16,035,000 
Deferred revenues, current portion
38,379,000 
30,123,000 
Total current liabilities
68,073,000 
59,211,000 
Deferred revenues, net of current portion
28,289,000 
31,707,000 
Deferred rent, net of current portion
9,393,000 
9,466,000 
Other long-term liabilities
438,000 
361,000 
Total liabilities
106,193,000 
100,745,000 
Commitments and contingencies (Note 11)
   
   
Stockholders' equity:
 
 
Preferred stock: $0.0001 par value; 5,000 shares authorized, no shares issued or outstanding as of December 31, 2017 and 2016
Common stock: $0.0001 par value; 150,000 shares authorized, 41,994 shares issued, and 41,967 shares outstanding as of December 31, 2017, and 40,441 shares issued, and 40,425 shares outstanding as of December 31, 2016
4,000 
4,000 
Treasury stock at cost; 27 and 16 shares at December 31, 2017 and 2016, respectively
(855,000)
(417,000)
Additional paid-in capital
259,726,000 
226,485,000 
Accumulated other comprehensive loss
(139,000)
(54,000)
Accumulated deficit
(152,114,000)
(125,783,000)
Total stockholders' equity
106,622,000 
100,235,000 
Total liabilities and stockholders' equity
$ 212,815,000 
$ 200,980,000 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value (in usd per share)
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized (in shares)
5,000,000 
5,000,000 
Preferred stock, shares issued (in shares)
Preferred stock, shares outstanding (in shares)
Common stock, par value (in usd per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized (in shares)
150,000,000 
150,000,000 
Common stock, shares issued (in shares)
41,994,000 
40,441,000 
Common stock, shares outstanding (in shares)
41,967,000 
40,425,000 
Treasury stock (in shares)
27,000 
16,000 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenues
$ 193,978 
$ 150,224 
$ 108,867 
Cost of revenues
99,485 1
77,429 1
59,128 1
Gross profit
94,493 
72,795 
49,739 
Operating expenses:
 
 
 
Sales and marketing
41,170 1
36,284 1
26,999 1
Research and development
40,338 1
32,460 1
21,534 1
General and administrative
37,179 1
31,959 1
22,977 1
Acquisition related costs
1,232 
6,307 
2,493 
Amortization of acquired intangibles
1,481 
1,470 
576 
Unoccupied lease charges
33 
Total operating expenses
121,400 
108,513 
74,579 
Loss from operations
(26,907)
(35,718)
(24,840)
Other income (expense):
 
 
 
Interest and other income
553 
358 
280 
Interest and other expense
(124)
(567)
(283)
Total other income (expense), net
429 
(209)
(3)
Loss before income taxes
(26,478)
(35,927)
(24,843)
Benefit from (provision for) income taxes
314 
(427)
(220)
Net loss
(26,164)
(36,354)
(25,063)
Other comprehensive gain (loss):
 
 
 
Unrealized gain (loss) on available-for-sale investments
(85)
47 
(87)
Comprehensive loss
$ (26,249)
$ (36,307)
$ (25,150)
Net loss per common share, basic and diluted (in dollars per share)
$ (0.63)
$ (0.92)
$ (0.67)
Weighted average common shares outstanding:
 
 
 
Basic and diluted (in shares)
41,218 
39,649 
37,275 
Consolidated Statements of Comprehensive Loss (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Stock-based compensation expenses
$ 20,939 
$ 12,640 
$ 7,362 
Cost of revenues
 
 
 
Stock-based compensation expenses
3,729 
2,043 
1,134 
Sales and marketing
 
 
 
Stock-based compensation expenses
3,243 
2,231 
1,570 
Research and development
 
 
 
Stock-based compensation expenses
4,464 
2,934 
1,186 
General and administrative
 
 
 
Stock-based compensation expenses
$ 9,503 
$ 5,432 
$ 3,472 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Accumulated Deficit
Beginning balance at Dec. 31, 2014
$ 78,940 
$ 3 
$ (20)
$ 143,337 
$ (14)
$ (64,366)
Common stock, beginning balance (in shares) at Dec. 31, 2014
 
34,696 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Stock-based compensation
7,362 
 
 
7,362 
 
 
Follow-on offering, net of issuance costs (in shares)
 
2,611 
 
 
 
 
Follow-on offerings, net of issuance costs
52,566 
 
52,565 
 
 
Shares acquired to settle the exercise of stock options (in shares)
 
(1)
 
 
 
 
Shares acquired to settle the exercise of stock options
(21)
 
(21)
 
 
 
Exercise of stock options (in shares)
 
1,578 
 
 
 
 
Exercise of stock options
4,277 
 
 
4,277 
 
 
Shares issued for the vesting of restricted stock awards (in shares)
 
 
 
 
 
Shares issued for the vesting of restricted stock awards
 
 
 
 
 
Other comprehensive (loss) gain
(87)
 
 
 
(87)
 
Net loss
(25,063)
 
 
 
 
(25,063)
Ending balance at Dec. 31, 2015
117,974 
(41)
207,541 
(101)
(89,429)
Common stock, ending balance (in shares) at Dec. 31, 2015
 
38,891 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Stock-based compensation
12,640 
 
 
12,640 
 
 
Follow-on offerings, net of issuance costs
 
 
 
 
Shares acquired to settle the exercise of stock options (in shares)
 
(14)
 
 
 
 
Shares acquired to settle the exercise of stock options
(376)
 
(376)
 
 
 
Exercise of stock options (in shares)
 
1,379 
 
 
 
 
Exercise of stock options
6,301 
 
 
6,301 
 
 
Shares issued for the vesting of restricted stock awards (in shares)
 
169 
 
 
 
 
Shares issued for the vesting of restricted stock awards
 
 
 
 
 
Adoption of new accounting standard (see Note 2)
 
 
167 
 
(167)
Other comprehensive (loss) gain
47 
 
 
 
47 
 
Net loss
(36,354)
 
 
 
 
(36,354)
Ending balance at Dec. 31, 2016
100,235 
(417)
226,485 
(54)
(125,783)
Common stock, ending balance (in shares) at Dec. 31, 2016
40,425 
40,425 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Stock-based compensation
20,939 
 
 
20,939 
 
 
Shares acquired to settle the exercise of stock options (in shares)
 
(11)
 
 
 
 
Shares acquired to settle the exercise of stock options
(438)
 
(438)
 
 
 
Exercise of stock options (in shares)
 
1,205 
 
 
 
 
Exercise of stock options
12,135 
 
 
12,135 
 
 
Shares issued for the vesting of restricted stock awards (in shares)
 
348 
 
 
 
 
Shares issued for the vesting of restricted stock awards
 
 
 
 
 
Other comprehensive (loss) gain
(85)
 
 
 
(85)
 
Net loss
(26,164)
 
 
 
 
(26,164)
Ending balance at Dec. 31, 2017
$ 106,622 
$ 4 
$ (855)
$ 259,726 
$ (139)
$ (152,114)
Common stock, ending balance (in shares) at Dec. 31, 2017
41,967 
41,967 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net loss
$ (26,164)
$ (36,354)
$ (25,063)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of deferred implementation, solution and other costs
7,455 
6,775 
5,007 
Depreciation and amortization
14,946 
12,199 
6,847 
Amortization of debt issuance costs
28 
96 
96 
Amortization of premiums on investments
319 
425 
319 
Stock-based compensation expenses
20,939 
12,640 
7,362 
Deferred income taxes
(350)
281 
85 
Allowance for sales credits
(3)
17 
38 
Loss on disposal of long-lived assets
33 
184 
Impairment of intangible assets
20 
Unoccupied lease charges
33 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(961)
(3,247)
(3,322)
Prepaid expenses and other current assets
240 
(237)
(150)
Deferred solution and other costs
(5,353)
(7,100)
(4,659)
Deferred implementation costs
(5,179)
(6,076)
(4,118)
Other long-term assets
(236)
47 
(1)
Accounts payable
3,367 
426 
1,343 
Accrued liabilities
(4,369)
10,641 
4,056 
Deferred revenue
4,837 
9,593 
14,021 
Deferred rent and other long-term liabilities
(77)
3,031 
3,538 
Net cash provided by operating activities
9,472 
3,394 
5,399 
Cash flows from investing activities:
 
 
 
Purchases of investments
(27,749)
(40,160)
(43,928)
Maturities of investments
27,907 
41,105 
20,908 
Purchases of property and equipment
(12,315)
(14,349)
(7,128)
Business combinations and asset acquisitions, net of cash acquired
(3,816)
(95)
(27,469)
Purchase of intangible assets
(323)
Capitalized software development costs
(970)
(2,692)
(313)
Increase in restricted cash
(1,000)
(486)
Net cash used in investing activities
(17,943)
(16,514)
(58,416)
Cash flows from financing activities:
 
 
 
Payments on financing obligations
(4,890)
(4,241)
Payments on capital lease obligations
(161)
(418)
Proceeds from the issuance of common stock, net of issuance costs
(8)
52,575 
Proceeds from exercise of stock options to purchase common stock
11,559 
6,003 
4,171 
Net cash provided by financing activities
11,559 
944 
52,087 
Net increase (decrease) in cash and cash equivalents
3,088 
(12,176)
(930)
Cash and cash equivalents, beginning of period
54,873 
67,049 
67,979 
Cash and cash equivalents, end of period
57,961 
54,873 
67,049 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for taxes
128 
120 
60 
Cash paid for interest
68 
217 
212 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Acquisition consideration payable to seller - working capital adjustment
95 
Acquisition consideration payable to seller - hold back
150 
2,500 
Shares acquired to settle the exercise of stock options
438 
376 
21 
Data center assets acquired under deferred payment arrangements or financing arrangements
$ 4,102 
$ 0 
$ 4,087 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business
Q2 Holdings, Inc. and its wholly-owned subsidiaries, collectively the "Company," is a leading provider of secure, cloud-based digital banking solutions. The Company enables regional and community financial institutions, or RCFIs, to deliver a robust suite of integrated digital banking services to more effectively engage with their consumer and commercial account holders who expect to bank anytime, anywhere and on any device. The Company delivers its solutions to the substantial majority of its customers using a software-as-a-service, or SaaS, model under which its RCFI customers pay subscription fees for the use of the Company's solutions. The Company was incorporated in Delaware in March 2005 and is a holding company that owns 100% of the outstanding capital stock of Q2 Software, Inc. The Company's headquarters are located in Austin, Texas.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and Securities and Exchange Commission, or SEC, requirements. The consolidated financial statements include the accounts of the Q2 Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts appearing in the prior year's Consolidated Statements of Cash Flows have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include revenue recognition, stock-based compensation, the carrying value of goodwill, the fair value of acquired intangibles, the capitalization of software development costs, the useful lives of property and equipment and long-lived intangible assets, and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments acquired with an original maturity of ninety days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost or fair value based on the underlying security.
Restricted Cash
Restricted cash consists of deposits held as collateral for the Company's secured letters of credit issued in place of the security deposit for the Company's corporate headquarters.
Investments
Investments consist primarily of U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and money market funds. All investments are considered available for sale and are carried at fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash, investments and accounts receivable. The Company's cash and cash equivalents, restricted cash and investments are placed with high credit quality financial institutions and issuers, and at times may exceed federally-insured limits. The Company has not experienced any loss relating to cash and cash equivalents or restricted cash in these accounts. The Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. No individual customer accounted for 10% or more of revenues for each of the years ended December 31, 2017, 2016 and 2015. No individual customer accounted for 10% of accounts receivable, net, as of December 31, 2017, and a single customer accounted for 15% of accounts receivable, net, as of December 31, 2016.
Accounts Receivable
Accounts receivable are stated at net realizable value, including both billed and unbilled receivables to customers. Unbilled receivable balances arise primarily when the Company provides services in advance of billing for these services and also when the Company earns revenues based on the number of registered users and the number of bill-pay and certain other transactions that registered users perform on the Company's solutions in excess of the levels included in the Company's minimum subscription fee. Generally, billing for revenues related to the number of registered users and the number of transactions processed by the Company's registered users occurs one month in arrears. Included in the accounts receivable balances as of December 31, 2017 and 2016 were unbilled receivables of $2.1 million and $1.2 million, respectively.
The Company assesses the collectability of outstanding accounts receivable on an ongoing basis and maintains an allowance for doubtful accounts for accounts receivable deemed uncollectable. As of December 31, 2017 and 2016, the Company did not provide for an allowance for doubtful accounts, as all amounts outstanding were deemed collectable. Historically, the Company's collection experience has not varied significantly, and bad debt expenses have been insignificant.
The Company maintains a reserve for estimated sales credits issued to customers for billing disputes or other service-related reasons. This allowance is recorded as a reduction against current period revenues and accounts receivable. In estimating this allowance, the Company analyzes prior periods to determine the amounts of sales credits issued to customers compared to the revenues in the period that related to the original customer invoice. This estimate is analyzed quarterly and adjusted as necessary. 
The following table shows the Company's allowance for sales credits as follows:
 
 
Beginning Balance
 
Additions
 
Deductions
 
Ending Balance
Year Ended December 31, 2015
 
$
173

 
$
513

 
$
(474
)
 
$
212

Year Ended December 31, 2016
 
212

 
488

 
(472
)
 
228

Year Ended December 31, 2017
 
$
228

 
$
683

 
$
(685
)
 
$
226


Deferred Implementation Costs
The Company capitalizes certain personnel and other costs such as employee salaries, benefits and the associated payroll taxes that are direct and incremental to the implementation of its solutions. The Company analyzes implementation costs that may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The Company assesses the recoverability of its deferred implementation costs by comparing the greater of the amount of the non-cancellable portion of a customer's contract and the non-refundable customer prepayments received as it relates to the specific implementation costs incurred. The Company begins amortizing the deferred implementation costs for an implementation once the revenue recognition criteria have been met, and the Company amortizes those deferred implementation costs ratably over the remaining term of the customer agreement. The portion of deferred implementation costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred implementation costs, current portion, and the remainder is recorded in long-term assets as deferred implementation costs, net of current portion.
Deferred Solution and Other Costs
The Company capitalizes sales commissions and other third-party costs such as third-party licenses and maintenance related to its customer agreements. The Company capitalizes sales commissions because the commission charges are so closely related to the revenues from the non-cancellable customer agreements that they should be recorded as an asset and charged to expense over the same period that the related revenue is recognized. The Company begins amortizing deferred solution and other costs for a particular customer agreement once the revenue recognition criteria are met and amortizes those deferred costs over the remaining term of the customer agreement. The Company analyzes solution and other costs that may be capitalized to assess their recoverability and only capitalizes costs that it anticipates to be recoverable. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred solution and other costs, current portion, and the remainder is recorded in long-term assets as deferred solution and other costs, net of current portion.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets. Maintenance and repairs that do not extend the life of or improve an asset are expensed in the period incurred.
The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
 
3 - 5 years
Purchased software and licenses
 
3 - 5 years
Furniture and fixtures
 
7 years
Leasehold improvements
 
Lesser of estimated useful life or lease term

Purchase Price Allocation, Intangible Assets, and Goodwill
The purchase price allocation for business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The Company early adopted Accounting Standards Update, or ASU, No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" as of January 1, 2017. Under ASU 2017-01, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business. If it's not met, the Company determines whether the single asset or group of assets, as applicable, meets the definition of a business.

In connection with the Company's acquisitions of Centrix Solutions, Inc., or Centrix, in July 2015, Smarty Pig, LLC, doing business as Social Money, or Social Money, in November 2015, and an asset purchase in January 2017, the Company recorded certain intangible assets, including acquired technology, customer relationships, trademarks, non-compete agreements and assembled workforce. Amounts allocated to the acquired intangible assets are being amortized on a straight-line basis over the estimated useful lives. The Company periodically reviews the estimated useful lives and fair values of its identifiable intangible assets, taking into consideration any events or circumstances which might result in a diminished fair value or revised useful life.

The excess purchase price over the fair value of assets acquired is recorded as goodwill. The Company tests goodwill for impairment annually in October, or whenever events or changes in circumstances indicate an impairment may have occurred. Because the Company operates in a single reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated fair value of the Company to the carrying value of the Company. The Company estimates the fair value of the reporting unit using a "step one" analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of projected future results to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for the Company's products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, the Company could incur impairment charges in a future period.
Deferred Revenues
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well as initial subscription fees. The Company recognizes deferred revenues as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Deferred revenues that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in current liabilities as deferred revenues, current portion, and the remaining portion is recorded in long-term liabilities as deferred revenues, net of current portion.
Revenues
All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions within a single operating segment. The Company derives the substantial majority of its revenues from subscription fees for the use of its solutions hosted in the Company's data centers as well as revenues for implementation and customer support services related to the Company's solutions. A small portion of the Company's customers host the Company's solutions in their own data centers under term license and maintenance agreements, and the Company recognizes the corresponding revenues ratably over the term of those customer agreements.
Revenues are recognized net of sales credits and allowances. The Company begins to recognize revenues for a customer when all of the following criteria are satisfied:
there is persuasive evidence of an arrangement;
the service has been or is being provided to the customer;
the collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
Determining whether and when these criteria have been met can require significant judgment and estimates. In general, revenue recognition commences when the Company's solutions are implemented and made available to the customers.

The Company's software solutions are available for use in hosted application arrangements under subscription fee agreements. Subscription fees from these applications, including related customer support, are recognized ratably over the customer agreement term beginning on the date the solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the Company's revenue recognition criteria have been met.

The Company considers subscription fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within the Company's standard payment terms. In determining whether collection of subscription fees is reasonably assured, the Company considers financial and other information about customers, such as a customer's current credit-worthiness and payment history over time. Historically, bad debt expenses have been insignificant.

The Company enters into arrangements with multiple-deliverables that generally include multiple subscription and implementation services. Additional agreements with existing customers that are not in close proximity to the original arrangements are treated as separate contracts for accounting purposes.

For multiple-deliverable arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. The Company's subscription services have standalone value as such services are often sold separately. In determining whether implementation services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. To date, the Company has concluded that the implementation services included in multiple-deliverable arrangements do not have standalone value. As a result, when implementation services are sold in a multiple-deliverable arrangement, the Company defers any arrangement fees for implementation services and recognizes such amounts ratably over the period of performance for the initial agreement term.

When multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence of selling price, or VSOE, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best estimate of selling price, or BESP, if neither VSOE nor TPE is available.  The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price. The amount of revenue allocated to delivered items is limited by contingent revenues.

The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company's discounting practices, the size and volume of transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company's go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.
Subscription Fee Revenues
The Company's solutions are available as hosted solutions under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from a hosted solution are recognized monthly over the customer agreement term beginning on the date the Company's solution is made available to the customer. Additional fees for monthly usage above the levels included in the standard subscription fee, which include fees for transactions processed during the period, are recognized as revenue in the month when the usage amounts are determined and reported. Any revenues related to upfront implementation services are recognized ratably over the same customer agreement term. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met.
Professional Services Revenues
When professional services are not combined with subscription services or term licenses as a single unit of accounting, these professional services revenues are recognized as the services are performed.
Certain out-of-pocket expenses billed to customers are recorded as revenues rather than an offset to the related expense. Revenues recorded from out-of-pocket expense reimbursements totaled approximately $1.5 million, $1.5 million and $1.3 million during the years ended December 31, 2017, 2016 and 2015, respectively. The out-of-pocket expenses are reported in cost of revenues.
Term Licenses and Maintenance Revenues
A small portion of the Company's customers host and manage the Company's solutions on-premises or in third-party data centers under term license and maintenance agreements. Term licenses sold with maintenance, which entitles the customer to technical support, upgrades and updates to the software made available on a when-and-if-available basis, are accounted for under Accounting Standards Codification, or ASC, 985-605, "Software Revenue Recognition." The Company does not have VSOE of fair value for the maintenance and professional services so the entire arrangement consideration is recognized monthly over the term of the software license when all of the other revenue recognition criteria have been met. Revenues from term licenses and maintenance agreements were not significant in the periods presented.
Cost of Revenues
Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, for employees providing services to the Company's customers. Costs associated with these services include the costs of the Company's implementation, customer support, data center and customer training personnel, as well as costs related to research and development personnel who perform implementation and customer support services. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in the Company's solutions, the amortization of deferred solution and services costs, co-location facility costs and depreciation of the Company's data center assets, an allocation of general overhead costs and referral fees. Direct costs of third-party intellectual property include amounts paid for third-party licenses and related maintenance that are incorporated into the Company's software and the amortization of acquired technology from the Company's recent acquisitions, with the costs amortized to cost of revenues over the useful lives of the purchased assets.

The Company capitalizes certain personnel costs directly related to the implementation of its solutions to the extent those costs are considered to be recoverable from future revenues. The Company amortizes the costs for a particular implementation once revenue recognition commences, and the Company amortizes those implementation costs over the remaining term of the customer agreement. Other costs not directly recoverable from future revenues are expensed in the period incurred. The Company capitalized implementation costs in the amount of $5.2 million, $6.1 million and $4.1 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Software Development Costs
Software development costs include salaries and other personnel-related costs, including employee benefits and bonuses attributed to programmers, software engineers and quality control teams working on the Company's software solutions. The costs related to software development that are incurred between reaching technological feasibility of a solution and the point at which the solution is ready for general release are capitalized and are included in intangible assets, net on the consolidated balance sheet. Capitalized software development costs are computed on an individual product basis, and products available for market are amortized to cost of revenues over the products' estimated economic lives. The Company recognized $0.5 million of amortization of capitalized software development costs for the year ended December 31, 2017 as all of the related individual products reached general release during 2017. The Company capitalized software development costs in the amount of $1.0 million, $2.7 million and $0.3 million during the years ended December 31, 2017, 2016, and 2015, respectively.
Research and Development Costs
Research and development costs include salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, third-party contractor expenses, software development tools, an allocation of facilities and depreciation expenses and other related expenses incurred in developing new solutions and upgrading and enhancing existing solutions. Research and development costs are expensed as incurred.
Advertising
All advertising costs of the Company are expensed the first time the advertising takes place. Advertising costs were $0.7 million, $0.3 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Sales Tax
The Company presents sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, excludes them from revenues.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders' equity that result from transactions and economic events other than those with stockholders. Other comprehensive loss consists of net loss and unrealized gains and losses on available-for-sale investments.
Stock-Based Compensation
Stock options and restricted stock units awarded to employees, directors and consultants are measured at fair value at each grant date. The Company recognizes compensation expense ratably over the requisite service period of the option or restricted stock unit award. As of January 1, 2017, the Company no longer uses a forfeiture rate to recognize compensation expense as a result of the adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over the following 36 months, and restricted stock unit awards vest in four annual installments of 25% each.

The Company values stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company's employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to be the mid-point between the vesting date and end of the contractual term. The Company used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Due to the Company's limited history as a public company, expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company assumed no dividend yield because it does not expect to pay dividends in the near future, which is consistent with the Company's history of not paying dividends.

The Company values restricted stock units at the closing market price on the date of grant, and recognizes compensation expense ratably over the requisite service period of the restricted stock unit award.
Income Taxes
Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs any positive evidence of its forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence, and it will adjust the valuation allowance as sufficient objective positive evidence becomes available. No tax related impact was recorded in the financial statements as a result of the adoption of ASU No. 2016-09.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through December 31, 2017, the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded.
Basic and Diluted Net Loss per Common Share
The following table sets forth the computations of net loss per share for the periods listed:
 
 
Year ended December 31,
 
 
2017

2016

2015
Numerators:
 
 
 
 
 
 
Net loss
 
$
(26,164
)
 
$
(36,354
)
 
$
(25,063
)
Denominator:
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
41,218

 
39,649

 
37,275

Net loss per common share, basic and diluted
 
$
(0.63
)
 
$
(0.92
)
 
$
(0.67
)

Due to net losses for each of the years ended December 31, 2017, 2016 and 2015, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive. The following table sets forth the anti-dilutive common share equivalents for the periods listed:
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
Stock options and restricted stock units
 
5,372

 
5,643

 
5,760


Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09, which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products are transferred to customers. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," or ASU 2015-14, that deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. In 2016, the FASB issued the following amendments to ASC 606: ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which clarifies the implementation guidance on principal versus agent considerations; ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which clarifies guidance on identification of performance obligations and licensing implementation; ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarifying guidance on assessing collectibility, presentation of sales taxes, noncash consideration, contract modifications and completed contracts; and ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. ASC 606 will be effective for the Company beginning in its first quarter of 2018 using the modified retrospective method.

The Company continues to evaluate all potential impacts of the new standard, as well as the changes that are required to systems, processes and internal controls to meet the new standard's reporting and disclosure requirements. The Company currently believes the most significant impact relates to its accounting for arrangements that include contractual provisions providing for periodic price increases in subscription fee arrangements. Under current GAAP, the Company accounts for periodic price increases in the period in which they occur, and under the new standard, the Company will recognize revenue from periodic price increases on a ratable basis over the term of the contract. Additionally under current GAAP, for contracts in which customers host and manage the Company's solutions on-premises or in third-party data centers under term license and maintenance agreements, the Company recognizes the entire arrangement consideration monthly over the term of the software license as the Company does not have VSOE of fair value for the license and maintenance. Under the new standard, the Company will be able to recognize software license revenue once the customer obtains control of the license, which will generally occur at the start of each license term. Under current GAAP, the Company also defers only direct and incremental commission costs to obtain a contract and amortizes those costs over the term of the related contract. Under the new standard, the Company will be required to defer additional incremental costs related to the customer contract and amortize those costs over the expected period of customer benefit. Also a portion of the commission payment will now be expensed as incurred. The Company is substantially complete with its evaluation of the effect that the adoption will have on its consolidated financial statements. In connection with the adoption of Topic 606, the Company expects to record a cumulative-effect adjustment to accumulated deficit of approximately $14 million to $16 million on December 31, 2017. The adjustment reflects the acceleration of revenues and deferral of expenses.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early application is permitted. The Company anticipates that the adoption of Topic 842 will impact its consolidated balance sheets as most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and corresponding operating lease liabilities upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," or ASU 2016-09, which amends ASC Topic 718, "Compensation – Stock Compensation." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard became effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this standard as of January 1, 2017 and has elected not to use a forfeiture rate. The adoption resulted in a cumulative-effect adjustment to accumulated deficit of $0.2 million, which was included in the condensed consolidated financial statements for the quarter ended March 31, 2017.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to clarify and provide specific guidance on eight cash flow classification issues that are not addressed by current GAAP and thereby reduce the current diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which provides guidance on the classification of restricted cash in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company early adopted this standard as of January 1, 2017, and its adoption did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-03, "Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)" to clarify the scope of Subtopic 610-20, "Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets," and to add guidance for partial sales of nonfinancial assets. This ASU amends the disclosure requirements for ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ASU No. 2016-02, "Leases (Topic 842)" and ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The Company adopted this ASU and added qualitative financial statement disclosures as necessary.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying amount of a reporting unit exceeds its fair value. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718)" to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Business Combinations and Asset Acquisitions
Business Combinations and Asset Acquisitions
Business Combinations and Asset Acquisitions
Asset Acquisition
In January 2017, the Company acquired the outstanding shares of a privately-owned company. In accordance with ASU 2017-01, the Company determined the set of assets acquired was not a business as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset, and the transaction was accounted for as an asset purchase. The Company acquired the assets for $1.5 million in cash from existing balances which includes a hold-back of $0.2 million payable twelve months after the closing date. Consideration was allocated on a relative fair value basis and resulted in $1.5 million in intangible assets including acquired technology and assembled workforce. Intangible assets do not have a tax basis, and therefore, are amortized on a straight-line basis over their estimated useful lives of three years. The acquired intangible assets are not amortizable for income tax purposes, which will result in an increase to deferred tax liabilities and a decrease of valuation allowance of $0.3 million.
Social Money
On November 30, 2015, the Company's wholly-owned subsidiary, Q2 Software, Inc. acquired all of the outstanding ownership interests of Social Money, a privately-owned financial services software company that offers a modern, cloud-based platform that assists financial institutions in its direct digital strategies. The purchase price paid was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill.
Social Money was acquired for approximately $10.7 million in cash from existing balances, including a customary post-closing working capital adjustment of $0.1 million, and a hold back of $2.5 million payable 18 months after closing date. At closing, the Company held back $2.5 million of the initial consideration, or hold-back amount, to compensate for any breach of a representation or warranty or any violation or default of any obligation by the sellers subsequent to the acquisition during a period of 18 months following the acquisition date. To the extent not utilized, the hold-back amount shall be paid to the former unit holders of Social Money at the end of the 18-month period unless there are any unresolved claims remaining at that time.
During 2017, the Company paid out $0.2 million in retention bonuses to certain of the Social Money employees based upon their continued employment with the Company. In addition, the Company released the entire $2.5 million hold-back to the former owners of Social Money upon the expiration of the hold-back period. The Company recognized $0.1 million and $0.2 million under these agreements in compensation expense which is included in acquisition related costs in the consolidated statement of comprehensive loss for the years ended December 31, 2017 and 2016, respectively.
The Company recorded the purchase of Social Money using the acquisition method of accounting and accordingly, recognized assets acquired and liabilities assumed at their fair values as of the date of acquisition. The results of Social Money's operations are included in the Company's consolidated results of operations beginning with the date of acquisition. Proforma results of operations related to this acquisition have not been presented since Social Money's operating results up to the date of acquisition were not material to the Company's consolidated financial statements.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:
Assets acquired:
 
 
   Cash
 
$
204

   Restricted cash
 
1,238

   Accounts receivable
 
123

   Other prepaid assets
 
86

   Property and equipment, net
 
87

   Intangible assets
 
6,424

   Goodwill
 
4,090

Total assets acquired
 
12,252

Liabilities assumed:
 
 
   Accounts payable
 
62

   Accrued liabilities and accrued compensation
 
257

   Customer deposit liability
 
1,238

Total liabilities assumed
 
1,557

Fair value of assets acquired and liabilities assumed
 
$
10,695


The goodwill recognized is attributable primarily to synergies expected from the integration of the acquired product offering into the Company's integrated solutions including an increasing customer base, the expanded service capabilities that are expected to become available from planned investments in the acquired products, and the value of the assembled work force in accordance with generally accepted accounting principles.
The fair value of the intangible assets was based on the income approach, discounted cash flow method and relief from royalty method, as appropriate. Intangible assets are amortized on a straight-line basis over their estimated useful lives. For the non-compete agreements, the estimated useful life is based upon the term of each individual agreement with certain key employees of Social Money. The acquisition is expected to be treated as a taxable asset acquisition for tax purposes, resulting in amortizable tax basis in acquired intangibles, including $4.1 million of tax basis goodwill.
Centrix
On July 31, 2015, the Company's wholly-owned subsidiary, Q2 Software, Inc. acquired all of the outstanding shares of Centrix, a privately-owned company that provides financial institutions with products that detect fraud, manage risk and simplify compliance. The purchase price paid was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill.
Centrix was acquired for approximately $21.0 million in cash from existing balances, including a customary post-closing working capital adjustment of $1.0 million which was paid in the fourth quarter of 2015. At closing, the Company deposited into an escrow account $2.0 million of the initial consideration, or escrow amount, to compensate for any breach of a representation or warranty or any violation or default of any obligation by the sellers subsequent to the acquisition during a period of 24 months following the acquisition date. The escrow amount was paid to the former shareholders of Centrix in the third quarter of 2017, less $0.3 million which was withheld as it related to miscellaneous liabilities that existed pre-acquisition.
The former shareholders of Centrix also have the right to receive in the aggregate up to $9.0 million based upon the achievement of certain milestone-based objectives and the continued employment of certain shareholders. Payouts under these agreements are contingent upon the future employment of these Centrix employees with the Company and were therefore not included as consideration in recording the business combination but will be recorded as compensation expense as earned. During the year ended December 31, 2017, the Company paid out $7.2 million to the former Centrix shareholders based upon the achievement of certain milestone-based objectives and continued employment. The Company has recognized approximately $1.1 million and $5.9 million under these agreements in compensation expense included in acquisition related costs in the consolidated statement of comprehensive loss for the years ended December 31, 2017 and 2016, respectively. The Company continues to accrue for payouts contingent upon future employment of acquired employees, and the unpaid amounts due to the former shareholders or continuing employees, as applicable, are recorded in accrued compensation in the consolidated balance sheets.
The Company recorded the purchase of Centrix using the acquisition method of accounting and accordingly, recognized assets acquired and liabilities assumed at their fair values as of the date of acquisition. The results of Centrix's operations are included in the Company's consolidated results of operations beginning with the date of acquisition. Proforma results of operations related to this acquisition have not been presented since Centrix's operating results up to the date of acquisition were not material to the Company's consolidated financial statements.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:
Assets acquired:
 
 
   Cash
 
$
1,417

   Accounts receivable
 
579

   Other prepaid assets
 
42

   Deferred solution and other costs
 
106

   Property and equipment, net
 
156

   Intangible assets
 
11,690

   Goodwill
 
8,786

Total assets acquired
 
22,776

Liabilities assumed:
 
 
   Accounts payable
 
46

   Accrued liabilities and accrued compensation
 
267

   Deferred revenue
 
1,483

Total liabilities assumed
 
1,796

Fair value of assets acquired and liabilities assumed
 
$
20,980


The goodwill recognized is attributable primarily to synergies expected from the integration of the acquired product offering into the Company's integrated solutions, the expanded service capabilities that are expected to become available from planned investments in the acquired products, and the value of the assembled work force in accordance with generally accepted accounting principles.
The fair value of the intangible assets was based on the income approach, discounted cash flow method and relief from royalty method. For the non-compete agreements, the estimated useful life is based upon the term of each individual agreement with certain former shareholders of Centrix. The acquisition is expected to be treated as a taxable asset acquisition for tax purposes, resulting in amortizable tax basis in acquired intangibles, including $13.4 million of tax basis goodwill.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
The carrying values of the Company's financial instruments, principally cash equivalents, investments, accounts receivable, restricted cash and accounts payable, approximated their fair values due to the short period of time to maturity or repayment.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
Level III—Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own assumptions.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring basis as of December 31, 2017:
 
 
 
 
Fair Value Measurements Using:
Cash Equivalents:
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Money market funds
 
$
9,279

 
$
9,279

 
$

 
$

 
 
 
 
 
 
 
 
 
Investments:
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
U.S. government agency bonds
 
$
16,194

 
$

 
$
16,194

 
$

Corporate bonds and commercial paper
 
15,815

 

 
15,815

 

Certificates of deposit
 
9,676

 

 
9,676

 

 
 
$
41,685

 
$

 
$
41,685

 
$


The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring basis as of December 31, 2016:
 
 
 
 
Fair Value Measurements Using:
Cash Equivalents:
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Money market funds
 
$
8,306

 
$
8,306

 
$

 
$

 
 
 
 
 
 
 
 
 
Investments:
 
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
U.S. government agency bonds
 
$
12,998

 
$

 
$
12,998

 
$

Corporate bonds and commercial paper
 
14,647

 

 
14,647

 

Certificates of deposit
 
14,604

 

 
14,604

 

 
 
$
42,249

 
$

 
$
42,249

 
$


The Company determines the fair value of its investment holdings based on pricing from its pricing vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs).
Cash, Cash Equivalents and Investments
Cash, Cash Equivalents and Investments
Cash, Cash Equivalents and Investments
The Company's cash, cash equivalents and investments as of December 31, 2017 and 2016 consisted primarily of cash, U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and money market funds.
The Company classifies investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses on available-for-sale investments are included in accumulated other comprehensive loss, a component of stockholders' equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely the Company will sell the investments before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net, in the consolidated statements of comprehensive loss. Interest, amortization of premiums and accretion of discount on all investments classified as available-for-sale are also included as a component of other income (expense), net, in the consolidated statements of comprehensive loss.
As of December 31, 2017 and 2016, the Company's cash was $48.7 million and $46.6 million, respectively.
A summary of the cash equivalents and investments as of December 31, 2017 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
9,279

 
$

 
$

 
$
9,279

Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
16,277

 
$

 
$
(83
)
 
$
16,194

Corporate bonds and commercial paper
 
15,871

 

 
(56
)
 
15,815

Certificates of deposit
 
9,676

 

 

 
9,676

 
 
$
41,824

 
$

 
$
(139
)
 
$
41,685

A summary of the cash equivalents and investments as of December 31, 2016 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
8,306

 
$

 
$

 
$
8,306

Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
13,028

 
$

 
$
(30
)
 
$
12,998

Corporate bonds and commercial paper
 
14,671

 

 
(24
)
 
14,647

Certificates of deposit
 
14,604

 

 

 
14,604

 
 
$
42,303

 
$

 
$
(54
)
 
$
42,249


The Company may sell its investments at any time, without significant penalty, for use in current operations or for other purposes, even if they have not yet reached maturity. As a result, the Company classifies its investments, including investments with maturities beyond twelve months, as current assets in the accompanying consolidated balance sheets.
The following table summarizes the estimated fair value of the Company's investments, designated as available-for-sale and classified by the contractual maturity date of the investments as of the dates shown:
 
 
December 31,
 
 
2017
 
2016
Due within one year or less
 
$
27,324

 
$
26,577

Due after one year through five years
 
14,361

 
15,672

 
 
$
41,685

 
$
42,249


The Company has certain available-for-sale investments in a gross unrealized loss position, all of which have been in such position for less than twelve months. The Company reviews its debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial position and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an other than temporary decline exists in one of these investments, the respective investment would be written down to fair value. For debt securities, the portion of the write-down related to credit loss would be recognized in other income, net in the consolidated statements of comprehensive loss. Any portion not related to credit loss would be included in accumulated other comprehensive loss. Because the Company does not intend to sell any investments which have an unrealized loss position at this time, and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider the investments with unrealized loss positions to be other than temporarily impaired as of December 31, 2017.
The following table shows the fair values and the gross unrealized losses of these available-for-sale investments aggregated by investment category as of December 31, 2017:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
16,277

 
$
(83
)
 
$
16,194

Corporate bonds and commercial paper
 
15,871

 
(56
)
 
15,815

 
 
$
32,148

 
$
(139
)
 
$
32,009


The following table shows the fair values and the gross unrealized losses of these available-for-sale investments aggregated by investment category as of December 31, 2016:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
13,028

 
$
(30
)
 
$
12,998

Corporate bonds and commercial paper
 
13,668

 
(24
)
 
13,644

 
 
$
26,696

 
$
(54
)
 
$
26,642

Deferred Solution and Other Costs
Deferred Solution and Other Costs
Deferred Solution and Other Costs
Deferred solution and other costs, current portion and net of current portion, consisted of the following:
 
 
December 31,
 
 
2017
 
2016
Deferred solution costs
 
$
6,505

 
$
6,295

Deferred commissions
 
2,741

 
2,544

Deferred solution and other costs, current portion
 
$
9,246

 
$
8,839

Deferred solution costs
 
$
5,291

 
$
4,741

Deferred commissions
 
7,682

 
6,384

Deferred solution and other costs, net of current portion
 
$
12,973

 
$
11,125

Property and Equipment
Property and Equipment
Property and Equipment
Property and equipment consisted of the following:
 
 
December 31,
 
 
2017
 
2016
Computer hardware and equipment
 
$
30,734

 
$
20,335

Purchased software and licenses
 
8,788

 
6,089

Furniture and fixtures
 
5,387

 
4,673

Leasehold improvements
 
13,470

 
11,597

 
 
58,379

 
42,694

Accumulated depreciation
 
(23,835
)
 
(15,214
)
Property and equipment, net
 
$
34,544

 
$
27,480


Depreciation expense was $9.2 million, $7.3 million and $5.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Depreciation expense included amortization of assets held under capital leases in the years ended December 31, 2016 and 2015.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets
The carrying amount of goodwill was $12.9 million at December 31, 2017 and 2016. Goodwill represents the excess purchase price over the fair value of assets acquired. During 2015, the Company completed the acquisitions of Centrix and Social Money. The Company has one operating segment and one reporting unit. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. The annual impairment test was performed as of October 31, 2017. No impairment of goodwill was identified during 2017.
Intangible assets at December 31, 2017 and 2016 were as follows:
 
 
As of December 31, 2017
 
As of December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
 
$
3,130

 
$
(1,294
)
 
$
1,836

 
$
3,130

 
$
(749
)
 
$
2,381

Non-compete agreements
 
884

 
(451
)
 
433

 
884

 
(266
)
 
618

Trademarks
 
2,140

 
(1,724
)
 
416

 
2,140

 
(1,010
)
 
1,130

Acquired technology
 
13,293

 
(7,464
)
 
5,829

 
11,920

 
(3,846
)
 
8,074

Assembled workforce
 
121

 
(38
)
 
83

 

 

 

Capitalized software development costs
 
3,975

 
(538
)
 
3,437

 
3,005

 

 
3,005

 
 
$
23,543

 
$
(11,509
)
 
$
12,034

 
$
21,079

 
$
(5,871
)
 
$
15,208


The estimated useful lives and weighted average amortization periods for intangible assets at December 31, 2017 are as follows (in years):
 
 
Estimated Useful Life
 
Weighted Average Amortization Period
Customer relationships
 
4 - 6
 
3.7
Non-compete agreements
 
2 - 5
 
2.7
Trademarks
 
2 - 3
 
0.8
Acquired technology
 
3 - 5
 
2.1
Assembled workforce
 
3
 
2.1
Capitalized software development costs
 
5
 
4.5
Total
 
 
 
3.0

The Company recorded intangible assets from the business combinations in 2015 and an asset acquisition in 2017, discussed in Note 3, Business Combinations and Asset Acquisitions. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from two to six years. Amortization expense included in cost of revenues in the consolidated statement of comprehensive loss was $3.6 million and $3.2 million for each of the years ended December 31, 2017 and 2016, respectively, and amortization expense included in operating expenses in the consolidated statement of comprehensive loss was $1.5 million for each of the years ended December 31, 2017 and 2016.
Capitalized software development costs were $4.0 million and $3.0 million as of December 31, 2017 and 2016, respectively. During the year ended 2017, all of the products related to capitalized software development costs reached general release, and the Company has commenced amortization of these costs. Amortization expense included in cost of revenues in the consolidated statement of comprehensive loss for capitalized software development costs was $0.5 million for the year ended December 31, 2017. Capitalized software development costs are computed on an individual product basis and those products available for market are amortized to cost of revenues over the products' estimated economic lives, which are expected to be five years.
The estimated future amortization expense related to intangible assets as of December 31, 2017 was as follows:
 
 
Amortization
Year Ended December 31,
 
 
2018
 
$
5,446

2019
 
3,183

2020
 
2,076

2021
 
1,072

2022 and thereafter
 
257

Total amortization
 
$
12,034

Accrued Liabilities
Accrued Liabilities
Accrued Liabilities
Accrued liabilities consisted of the following:
 
 
December 31,
 
 
2017
 
2016
Accrued data center equipment and software purchases
 
$
4,410

 
$
232

Accrued transaction processing fees
 
1,687

 
1,790

Accrued professional services
 
1,419

 
1,518

Acquisition hold back
 
150

 
2,500

Deferred rent
 
1,197

 
1,066

Other
 
1,699

 
1,716

 
 
$
10,562

 
$
8,822

Debt
Debt
Debt
In April 2013, the Company entered into a secured credit facility agreement, or Credit Facility, with Wells Fargo Bank, National Association, or Wells Fargo, which the Company and Wells Fargo subsequently amended several times, most recently on March 31, 2016, to modify the Credit Facility to allow for the acquisition of Social Money. The Credit Facility, as amended, provided for a line of credit of up to $25.0 million, with an accordion feature, or Accordion Feature, allowing the Company to increase its maximum borrowings by up to an additional $25.0 million, subject to certain conditions and limitations, including that borrowings at any time would be limited to 75% of the Company's trailing twelve-month recurring revenues. Access to the total borrowings available under the Credit Facility was restricted based on covenants related to the Company's minimum liquidity and adjusted EBITDA. Amounts borrowed under the Credit Facility accrued interest, at the Company's election at either: (i) the per annum rate equal to the LIBOR rate plus an applicable margin; or (ii) the then current base rate plus the greater of the U.S. Federal Funds rate plus one percentage point, the one-month LIBOR plus one percentage point, or the lending financial institution's prime rate. The Company paid a monthly fee based on the total unused borrowings balance, an annual administrative fee and the initial closing fee, which was paid in three equal annual installments over the first three years of the Credit Facility. The Accordion Feature expired in October 2016, at which time maximum borrowings under the Facility were reduced to $25.0 million.

On April 11, 2017, the Credit Facility expired pursuant to its original terms. Upon the expiration of the Credit Facility, the Company paid off the outstanding balance, which was less than $0.1 million, and the secured letter of credit which had been issued against the facility for the security deposit for its corporate headquarters is now secured by a $1.0 million restricted deposit with Wells Fargo.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Operating Lease Commitments
The Company leases office space under non-cancellable operating leases for its corporate headquarters in Austin, Texas in two adjacent buildings under separate lease agreements, pursuant to the first of which the Company leases approximately 67 square feet of office space with an initial term that expires on April 30, 2021, with the option to extend the lease for an additional five-year term, and pursuant to the second of which the Company leases approximately 129 square feet of office space with an initial term that expires on April 30, 2028, with the option to extend the lease for an additional ten-year term. The Company also leases office space in: Lincoln, Nebraska; Des Moines, Iowa; Atlanta, Georgia; Asheville, North Carolina; and, south Austin, Texas. The Company believes its current facilities will be adequate for its needs for the foreseeable future. Rent expense under operating leases was $4.4 million, $3.7 million and $1.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Future minimum payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2017 were as follows:
 
 
Operating Leases
Year Ended December 31,
 
 
2018
 
$
5,675

2019
 
5,692

2020
 
5,694

2021
 
4,781

2022
 
4,296

Thereafter
 
20,442

Total minimum lease payments
 
$
46,580


Contractual Commitments
The Company has non-cancelable contractual commitments related to third-party products, co-location fees and other product costs. The Company is party to several purchase commitments for third-party products that contain both a contractual minimum obligation and a variable obligation based upon usage or other factors which can change on a monthly basis. The estimated amounts for usage and other factors are not included within the table below. Future minimum contractual commitments that have initial or remaining non-cancelable terms in excess of one year were as follows:
 
 
Contractual Commitments
Year Ended December 31,
 
 
2018
 
$
13,227

2019
 
11,060

2020
 
7,413

2021
 
7,355

2022
 
7,355

Thereafter
 
5,517

Total commitments
 
$
51,927


Legal Proceedings
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that, if determined adversely to the Company, would have a material adverse effect on the Company.
Stockholders' Equity
Stockholders' Equity
Stockholders' Equity
Follow-On Offerings
On March 4, 2015, the Company and certain selling stockholders completed a follow-on offering of 5,122 shares of common stock at $19.75 per share, and sold an additional 768 shares of common stock at $19.75 per share when the underwriters exercised their over-allotment option to purchase additional shares. The total shares sold in the follow-on offering and shares sold when the underwriters exercised their over-allotment option included 4,133 shares sold by selling stockholders and 1,757 shares sold by the Company. After deducting the payment of underwriters' discounts and commissions and offering costs, the net proceeds to the Company from the sale of shares in the offering and the sale of shares when the underwriters exercised their over-allotment option was approximately $32.3 million.
On September 30, 2015, the Company and certain selling stockholders completed a follow-on offering of 3,799 shares of common stock at $25.50 per share, and on October 15, 2015, selling stockholders sold an additional 570 shares of common stock at $25.50 per share when the underwriters exercised their over-allotment option to purchase additional shares. The total shares sold in the follow-on offering and shares sold when the underwriters exercised their over-allotment option included 3,516 shares sold by selling stockholders and 853 shares sold by the Company. After deducting the payment of underwriters' discounts and commissions and offering costs, the net proceeds to the Company from the sale of shares in the offering was approximately $20.3 million.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
In March 2014, the Company's board of directors approved the 2014 Equity Incentive Plan, or 2014 Plan, under which stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash-based or stock-based awards may be granted to employees, consultants and directors. Shares of common stock that are issued and available for issuance under the 2014 Plan consist of authorized, but unissued or reacquired shares of common stock or any combination thereof.
As of December 31, 2016, a total of 5,413 shares had been reserved for issuance under the 2014 Plan. The 2014 Plan contains a provision that automatically increases the shares available for issuance under the plan on January 1 of each year subsequent to the 2014 Plan's adoption through 2024, by an amount equal to the smaller of (a) 4.5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company's board of directors. On January 1, 2017, 1,819 shares were added to the 2014 Plan in accordance with the annual automatic increase provision of the 2014 Plan. In addition, the 2014 Plan reserve is automatically increased to include any shares issuable upon expiration or termination of options granted under the Company's 2007 Stock Plan, or 2007 Plan, for options that expire or terminate without having been exercised. For the year ended December 31, 2017, 66 shares have been transferred to the 2014 Plan from the 2007 Plan, and as of December 31, 2017, a total of 7,298 shares were allocated for issuance under the 2014 Plan. As of December 31, 2017, options to purchase a total of 2,695 shares of common stock have been granted under the 2014 Plan, 2,425 shares have been reserved under the 2014 Plan for the vesting of restricted stock units, 439 shares have been returned to the 2014 Plan as a result of termination of options that expired or terminated without having been exercised and restricted stock awards that terminated prior to the awards vesting, and 2,617 shares of common stock remain available for future issuance under the 2014 Plan. Shares of common stock that are issued and were available for issuance under the 2014 Plan consist of authorized, but unissued or reacquired shares of common stock or any combination thereof.
In July 2007, the Company adopted the 2007 Plan under which options or stock purchase rights may be granted to employees, consultants and directors. Upon the completion of the Company's initial public offering, or IPO, in March 2014, the board of directors terminated the 2007 Plan in connection with the IPO and all shares that were available for future issuance under the 2007 Plan at such time were transferred to the 2014 Plan. The 2007 Plan will continue to govern the terms and conditions of all outstanding equity awards granted under the 2007 Plan. As of December 31, 2017no shares remain available for future issuance under the 2007 Plan. Shares of common stock that are issued and were available for issuance under the 2007 Plan consist of authorized, but unissued or reacquired shares of common stock or any combination thereof.

Stock Options

The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods indicated:

 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Risk-free interest rate
 
1.7 - 2.1%
 
1.0 - 1.8%
 
1.5 - 1.6%
Expected life (in years)
 
4.8
 
3.8 - 4.8
 
4.3 - 4.8
Expected volatility
 
41.5 - 43.1%
 
43.9 - 46.5%
 
45.7 - 46.9%
Dividend yield
 
 
 
Weighted-average grant date fair value per share          
 
$14.17
 
$9.32
 
$9.38


Stock option activity was as follows:

 
 
Number of
Options
 
Weighted
Average
Exercise Price
Balance as of January 1, 2015
 
6,111

 
$
5.90

Granted
 
582

 
23.12

Exercised
 
(1,578
)
 
2.71

Forfeited
 
(71
)
 
8.95

Balance as of December 31, 2015
 
5,044

 
8.84

Granted
 
892

 
23.49

Exercised
 
(1,379
)
 
4.57

Forfeited
 
(123
)
 
16.08

Balance as of December 31, 2016
 
4,434

 
12.91

Granted
 
643

 
36.44

Exercised
 
(1,205
)
 
10.07

Forfeited
 
(180
)
 
19.15

Balance as of December 31, 2017
 
3,692

 
$
17.63



The summary of stock options outstanding as of December 31, 2017 is as follows:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
$0.29 - $5.05
 
385

 
$
2.24

 
3.1
 
385

 
$
2.24

 
3.1
$5.93 - $13.00
 
1,265

 
8.39

 
2.9
 
1,221

 
8.39

 
2.9
$15.07 - $24.33
 
932

 
18.57

 
4.4
 
527

 
18.40

 
4.3
$24.89 - $39.85
 
1,044

 
32.14

 
5.8
 
160

 
27.75

 
5.2
$41.90
 
66

 
41.90

 
6.8
 

 

 
0.0
 
 
3,692

 
$
17.63

 
4.2
 
2,293

 
$
11.01

 
3.4

Restricted Stock Units
The Company's restricted stock units typically vest over a four-year period and upon vesting, the vested shares are issued to the recipient of the restricted stock units.
Restricted stock unit activity was as follows:
 
 
Number of
Shares
 
Weighted
Average
Grant Date Fair Value
Nonvested as of January 1, 2015
 
28

 
$
19.44

Granted
 
707

 
26.39

Vested
 
(7
)
 
19.44

Forfeited
 
(12
)
 
26.14

Nonvested as of December 31, 2015
 
716

 
26.19

Granted
 
751

 
25.55

Vested
 
(171
)
 
26.00

Forfeited
 
(86
)
 
25.54

Nonvested as of December 31, 2016
 
1,210

 
25.87

Granted
 
939

 
38.58

Vested
 
(349
)
 
26.35

Forfeited
 
(120
)
 
28.94

Nonvested as of December 31, 2017
 
1,680

 
$
32.65


The aggregate intrinsic value of stock options exercised during each of the years ended December 31, 2017, 2016 and 2015 was $33.9 million, $29.4 million and $32.7 million, respectively. The total fair value of stock options vested during each of the years ended December 31, 2017, 2016 and 2015 was $8.1 million, $8.7 million and $3.4 million, respectively.
As of December 31, 2017, the aggregate intrinsic value of options outstanding was $71.3 million, the total unrecognized stock-based compensation expense related to stock options was $13.6 million, which the Company expects to recognize over the next 2.7 years, and total unrecognized stock-based compensation expense related to restricted stock units was $47.1 million, which the Company expects to recognize over the next 3.0 years.
Provision for Income Taxes
Provision for Income Taxes
Provision for Income Taxes
The components of the Company's (benefit from) provision for income taxes from continuing operations consisted of the following:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Current taxes:
 
 
 
 
 
 
Federal
 
$
(100
)
 
$

 
$

Foreign
 
62

 
33

 

State
 
74

 
112

 
135

Total current taxes
 
$
36

 
$
145

 
$
135

Deferred taxes:
 
 
 
 
 
 
Federal
 
$
32

 
$
262

 
$

State
 
(382
)
 
20

 
85

Total deferred taxes
 
(350
)
 
282

 
85

(Benefit from) provision for income taxes
 
$
(314
)
 
$
427

 
$
220


The Company had federal net operating loss carryforwards of approximately $168.1 million and $129.5 million at December 31, 2017 and 2016, respectively, which will expire at various dates beginning in 2026, if not utilized. The Company also held state tax credits of $0.5 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively, federal alternative minimum tax credits of $0.1 million for each of the years ended December 31, 2017 and 2016, and federal R&D tax credits of $1.2 million and zero for the years ended December 31, 2017 and 2016, respectively. The state tax credits will expire in 2026 if not utilized, the federal R&D tax credits will expire at various dates beginning in 2027, if not utilized, and the federal alternative minimum tax credits have an indefinite carryforward period.
Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes consisted of the following:
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
NOL and credit carryforwards
 
$
40,716

 
$
29,034

Deferred revenue
 
8,216

 
9,910

Accrued expenses and other
 
6,802

 
9,829

Stock-based compensation
 
4,615

 
4,598

Total deferred tax assets
 
60,349

 
53,371

Deferred tax liabilities:
 
 
 
 
Deferred expenses
 
(6,198
)
 
(8,337
)
Depreciation and amortization
 
(1,426
)
 
(2,887
)
Total deferred tax liabilities
 
(7,624
)
 
(11,224
)
Deferred tax assets less tax liabilities
 
52,725

 
42,147

Less: valuation allowance
 
(52,629
)
 
(42,401
)
Net deferred tax asset (liability)
 
$
96

 
$
(254
)

The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history. During 2017, the valuation allowance increased by approximately $20.4 million due to continuing operations.
The Company's benefit from (provision for) income taxes attributable to continuing operations differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of 34% to income before taxes for the years ended December 31, 2017, 2016 and 2015 primarily as a result of the following:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Income tax at U.S. statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
Effect of:
 
 
 
 
 
 
Increase in deferred tax valuation allowance
 
(77.1
)
 
(36.3
)
 
(34.5
)
Stock compensation
 
32.7

 

 

R&D Credit
 
4.7

 

 

State taxes, net of federal benefit
 
6.2

 
1.7

 
1.6

Tax impact of federal law change
 
1.2

 

 

Other permanent items
 
(0.5
)
 
(0.6
)
 
(2.0
)
Income tax benefit (provision) effective rate
 
1.2
 %
 
(1.2
)%
 
(0.9
)%

The Company files income tax returns in the U.S. federal jurisdiction and several state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2014. Operating losses generated in years prior to 2014 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses are utilized. The tax years 2014 through 2017 remain open to examination by all the major taxing jurisdictions to which the Company is subject, though the Company is not currently under examination by any major taxing jurisdiction.
The Company did not have any uncertain tax positions as of December 31, 2017, 2016 and 2015. The Company's policy is to accrue interest and penalties related to uncertain tax positions as a component of income tax expense. For the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any interest or penalties.
The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, the Company does not have any foreign subsidiaries and the international aspects of the Tax Act are not applicable.
In connection with the initial analysis of the impact of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax balance was primarily offset by application of its valuation allowance. The Company is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts related to the remeasurement of the deferred tax balance as a tax benefit of $0.2 million. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.
Employee Benefit Plan
Employee Benefit Plan
Employee Benefit Plan
In January 2009, the Company adopted a 401(k) profit-sharing plan, or 401(k) Plan, covering substantially all employees. Employees can contribute between 1% and 90% of their total earnings. The 401(k) Plan also provides for employer contributions to be made at the Company's discretion. As of December 31, 2017, the Company had not made any discretionary contributions.
Centrix had a 401(k) plan, or the Centrix 401(k) Plan, covering substantially all employees. Under the Centrix 401(k) Plan, employees could elect to contribute up to $18,000 of their eligible compensation to the Centrix 401(k) Plan, subject to certain limitations. The 401(k) Plan also provides for employer contributions to be made at the Company's discretion. For the years ended December 31, 2015 Centrix made contributions of approximately $0.1 million to the Centrix 401(k) Plan. Centrix employees who participated in the Centrix 401(k) Plan remained enrolled subsequent to the acquisition and through January 2016, when the Centrix 401(k) Plan was merged into the 401(k) Plan.
Segments and Geographic Information
Segments and Geographic Information
Segments and Geographic Information
All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions in a single operating segment. The Company's chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. All of the Company's principal operations, assets and decision-making functions are located in the United States.
Related Parties
Related Parties
Related Parties
For the years ended December 31, 2017, 2016 and 2015, the Company recorded revenues from a related-party customer of $0.4 million, $0.5 million and $0.4 million, respectively.
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)
Selected summarized quarterly financial information for the years ended 2017 and 2016 is as follows:
 
 
Three Months Ended
 
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 
December 31, 2016
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
 
December 31, 2017
Revenues
 
$
33,759

 
$
36,005

 
$
38,305

 
$
42,155

 
$
44,534

 
$
47,625

 
$
50,116

 
$
51,703

Cost of revenues
 
17,814

 
18,870

 
19,599

 
21,146

 
22,772

 
24,328

 
25,813

 
26,572

Gross profit
 
15,945

 
17,135

 
18,706

 
21,009

 
21,762

 
23,297

 
24,303

 
25,131

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
8,207

 
9,611

 
8,980

 
9,486

 
9,878

 
11,096

 
9,904

 
10,292

Research and development
 
7,903

 
7,830

 
8,219

 
8,508

 
9,651

 
9,922

 
10,092

 
10,673

General and administrative
 
7,421

 
7,437

 
8,624

 
8,477

 
8,452

 
9,268

 
9,596

 
9,863

Acquisition related costs
 
1,482

 
1,476

 
1,835

 
1,514

 
348

 
351

 
270

 
263

Amortization of acquired intangibles
 
368

 
368

 
368

 
366

 
371

 
373

 
369

 
368

Unoccupied lease charges
 

 
33

 

 

 

 

 

 

Total operating expenses
 
25,381

 
26,755

 
28,026

 
28,351

 
28,700

 
31,010

 
30,231

 
31,459

Loss from operations
 
(9,436
)
 
(9,620
)
 
(9,320
)
 
(7,342
)
 
(6,938
)
 
(7,713
)
 
(5,928