Q2 HOLDINGS, INC., 10-Q filed on 11/2/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 31, 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
 
41,672,523 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2017 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 40,140 
$ 54,873 
Restricted cash
2,915 
1,315 
Investments
48,717 
42,249 
Accounts receivable, net
15,768 
12,240 
Prepaid expenses and other current assets
5,093 
3,215 
Deferred solution and other costs, current portion
9,416 
8,839 
Deferred implementation costs, current portion
3,590 
2,938 
Total current assets
125,639 
125,669 
Property and equipment, net
32,140 
27,480 
Deferred solution and other costs, net of current portion
12,411 
11,125 
Deferred implementation costs, net of current portion
8,387 
8,096 
Intangible assets, net
13,512 
15,208 
Goodwill
12,900 
12,876 
Other long-term assets
502 
526 
Total assets
205,467 
200,980 
Current liabilities:
 
 
Accounts payable
6,347 
4,231 
Accrued liabilities
5,901 
8,822 
Accrued compensation
11,501 
16,035 
Deferred revenues, current portion
40,505 
30,123 
Total current liabilities
64,254 
59,211 
Deferred revenues, net of current portion
28,286 
31,707 
Deferred rent, net of current portion
9,711 
9,466 
Other long-term liabilities
579 
361 
Total liabilities
102,830 
100,745 
Commitments and contingencies (Note 8)
   
   
Stockholders' equity:
 
 
Preferred stock: $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding as of September 30, 2017 and December 31, 2016
Common stock: $0.0001 par value; 150,000 shares authorized; 41,673 issued and 41,652 shares outstanding as of September 30, 2017 and 40,441 shares issued and 40,425 shares outstanding as of December 31, 2016
Treasury stock at cost: 21 shares at September 30, 2017 and 16 shares at December 31, 2016
(597)
(417)
Additional paid-in capital
249,892 
226,485 
Accumulated other comprehensive loss
(69)
(54)
Accumulated deficit
(146,593)
(125,783)
Total stockholders' equity
102,637 
100,235 
Total liabilities and stockholders' equity
$ 205,467 
$ 200,980 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized
5,000,000 
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
41,673,000 
40,441,000 
Common stock, shares outstanding
41,652,000 
40,425,000 
Treasury stock, shares
21,000 
16,000 
Condensed Consolidated Statements of Comprehensive Loss (unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
Revenues
$ 50,116 
$ 38,305 
$ 142,275 
$ 108,069 
Cost of revenues
25,813 1
19,599 1
72,913 1
56,283 1
Gross profit
24,303 
18,706 
69,362 
51,786 
Operating expenses:
 
 
 
 
Sales and marketing
9,904 1
8,980 1
30,878 1
26,798 1
Research and development
10,092 1
8,219 1
29,665 1
23,952 1
General and administrative
9,596 1
8,624 1
27,316 1
23,482 1
Acquisition related costs
270 
1,835 
969 
4,793 
Amortization of acquired intangibles
369 
368 
1,113 
1,104 
Unoccupied lease charges
33 
Total operating expenses
30,231 
28,026 
89,941 
80,162 
Loss from operations
(5,928)
(9,320)
(20,579)
(28,376)
Other income (expense):
 
 
 
 
Interest and other income
149 
90 
386 
260 
Interest and other expense
(154)
(94)
(395)
Total other income (expense), net
149 
(64)
292 
(135)
Loss before income taxes
(5,779)
(9,384)
(20,287)
(28,511)
Provision for income taxes
(3)
(97)
(356)
(330)
Net loss
(5,782)
(9,481)
(20,643)
(28,841)
Other comprehensive gain (loss):
 
 
 
 
Unrealized gain (loss) on available-for-sale investments
15 
(17)
(15)
88 
Comprehensive loss
$ (5,767)
$ (9,498)
$ (20,658)
$ (28,753)
Net loss per common share, basic and diluted (usd per share)
$ (0.14)
$ (0.24)
$ (0.50)
$ (0.73)
Weighted average common shares outstanding:
 
 
 
 
Basic and diluted (in shares)
41,386 
39,870 
41,030 
39,445 
[1] Includes stock-based compensation as follows for the three months ended September 30, 2017 and 2016, respectively, Cost of Revenues of $983 and $547, respectively; Sales and Marketing of $699 and $587, respectively; Research and development of $1,149 and $766, respectively; General and administrative of $2,576 and $1,459, respectively; Total stock-based compensation of $5,407 and $3,359, respectively. Stock-based compensation as follows for the six months ended September 30, 2017 and 2016, respectively, was Cost of Revenues of $2,526 and $1,408, respectively; Sales and Marketing of $2,142 and $1,514, respectively; Research and development of $3,127 and $2,050, respectively; General and administrative of $6,831 and $3,849, respectively; Total stock-based compensation of $14,626 and $8,821, respectively.
Condensed Consolidated Statements of Comprehensive Loss (unaudited) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Stock-based compensation expenses
$ 5,407 
$ 3,359 
$ 14,626 
$ 8,821 
Cost of revenues
 
 
 
 
Stock-based compensation expenses
983 
547 
2,526 
1,408 
Sales and marketing
 
 
 
 
Stock-based compensation expenses
699 
587 
2,142 
1,514 
Research and development
 
 
 
 
Stock-based compensation expenses
1,149 
766 
3,127 
2,050 
General and administrative
 
 
 
 
Stock-based compensation expenses
$ 2,576 
$ 1,459 
$ 6,831 
$ 3,849 
Condensed Consolidated Statements of Cash Flows (unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (20,643)
$ (28,841)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
Amortization of deferred implementation, solution and other costs
5,526 
4,928 
Depreciation and amortization
11,049 
8,935 
Amortization of debt issuance costs
28 
72 
Amortization of premiums on investments
263 
324 
Stock-based compensation expenses
14,626 
8,821 
Deferred income taxes
227 
208 
Allowance for sales credits
29 
Loss on disposal of long-lived assets
102 
Unoccupied lease charges
33 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(3,529)
(7,265)
Prepaid expenses and other current assets
(1,881)
(2,062)
Deferred solution and other costs
(4,162)
(6,617)
Deferred implementation costs
(4,169)
(4,784)
Other long-term assets
(99)
(109)
Accounts payable
1,870 
1,361 
Accrued liabilities
(4,972)
7,841 
Deferred revenues
6,960 
12,319 
Deferred rent and other long-term liabilities
244 
3,316 
Net cash provided by (used in) operating activities
1,343 
(1,389)
Cash flows from investing activities:
 
 
Purchases of investments
(25,267)
(32,024)
Maturities of investments
18,519 
34,650 
Purchases of property and equipment
(11,379)
(13,553)
Business combinations and asset acquisitions, net of cash acquired
(3,816)
(95)
Capitalized software development costs
(970)
(1,932)
Purchases of intangible assets
(263)
Increase in restricted cash
(1,600)
Net cash used in investing activities
(24,513)
(13,217)
Cash flows from financing activities:
 
 
Payments on financing obligations
(4,890)
Payments on capital lease obligations
(161)
Proceeds from the issuance of common stock, net of issuance costs
(8)
Proceeds from exercise of stock options to purchase common stock
8,617 
4,462 
Shares acquired to settle the exercise of stock options
(180)
(223)
Net cash provided by (used in) financing activities
8,437 
(820)
Net decrease in cash and cash equivalents
(14,733)
(15,426)
Cash and cash equivalents, beginning of period
54,873 
67,049 
Cash and cash equivalents, end of period
40,140 
51,623 
Supplemental disclosures of cash flow information:
 
 
Cash paid for taxes
128 
120 
Cash paid for interest
$ 68 
$ 167 
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
As used in this report, the terms "we," "us," "our," or the "Company" refer to Q2 Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. These interim unaudited condensed 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 for interim financial statements. The interim unaudited condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
In the Company's opinion, the accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K, filed with the SEC on February 21, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other period.
Use of Estimates
The preparation of the accompanying interim unaudited condensed 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 interim unaudited condensed 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 three and nine months ended September 30, 2017 and 2016. No individual customer accounted for 10% or more of accounts receivable, net, as of September 30, 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 digital banking 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 September 30, 2017 and December 31, 2016 were unbilled receivables of $2.0 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 September 30, 2017 and December 31, 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 allowance for sales credits was $0.2 million at each of September 30, 2017 and December 31, 2016.
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 its 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 its 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 $0.4 million for each of the three months ended September 30, 2017 and 2016, and $1.2 million for each of the nine months ended September 30, 2017 and 2016. 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 a reclassification of 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 $1.5 million and $1.7 million during the three months ended September 30, 2017 and 2016, respectively, and $4.2 million and $4.8 million during the nine months ended September 30, 2017 and 2016, 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 condensed 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 $0.1 million and $0.3 million of amortization of capitalized software development costs for the three and nine months ended September 30, 2017 as all of the related individual products reached general release in the first nine months of 2017. The Company capitalized software development costs in the amount of $0.2 million and $0.7 million during the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $1.9 million during the nine months ended September 30, 2017 and 2016, 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 $0.2 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and were $0.5 million and $0.2 million for the nine months ended September 30, 2017 and 2016, 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%.
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 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 September 30, 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:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Numerators:
 
 
 
 
 
 
 
 
Net loss
 
$
(5,782
)
 
$
(9,481
)
 
$
(20,643
)
 
$
(28,841
)
Denominators:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
41,386

 
39,870

 
41,030

 
39,445

Net loss per common share, basic and diluted
 
$
(0.14
)
 
$
(0.24
)
 
$
(0.50
)
 
$
(0.73
)

Due to net losses for the three and nine months ended September 30, 2017 and 2016, basic and diluted net 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 that were excluded for the periods listed:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Stock options and restricted stock units
 
5,575

 
5,981

 
5,575

 
5,981


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. The new revenue standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect recognized as of the date of adoption. The Company plans to adopt the standard using the modified retrospective method.
The Company continues to evaluate all potential impacts of the new standard, as well as the changes that may be 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 or price increases that are dependent upon external factors such as an RCFI's increase in usage. 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 likely 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 likely 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 likely be required to defer additional incremental costs related to the customer contract and amortize those costs over the expected period of customer benefit. The Company also expects a portion of the commission payment to be expensed as incurred. The Company is working to quantify the impact of the new standard on arrangements that include increases in usage, the impact of the deferral of additional incremental costs of obtaining a contract with a customer and the appropriate amortization period for such costs.
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 currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed consolidated financial statements.
Business Combinations and Asset Acquisitions
Business Combinations and Asset Acquisitions
Business Combinations and Asset Acquisitions
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 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 $0.5 million.
During 2015, the Company 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 and 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 their direct digital strategies. During the first nine months of 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. During the first half of 2017, the Company also paid out $0.2 million in retention bonuses to certain of the Social Money employees based upon their continued employment with the Company and 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 continues to accrue for payouts contingent upon future employment of acquired employees. The Company has recognized $0.3 million and $1.8 million under these agreements in compensation expense included in acquisition related costs in the condensed consolidated statement of comprehensive loss for the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively. The unpaid amounts due to the former shareholders or continuing employees, as applicable, are recorded in accrued compensation in the consolidated balance sheets as of September 30, 2017.
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 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Inputs other than quoted prices included within Level 1 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 3—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 September 30, 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
 
$
2,170

 
$
2,170

 
$

 
$

 
 
 
 
 
 
 
 
 
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
 
$
16,011

 
$

 
$
16,011

 
$

Corporate bonds and commercial paper
 
19,884

 

 
19,884

 

Certificates of deposit
 
12,822

 

 
12,822

 

 
 
$
48,717

 
$

 
$
48,717

 
$


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 our 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 September 30, 2017 and December 31, 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 condensed 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 condensed consolidated statements of comprehensive loss.
As of September 30, 2017 and December 31, 2016, the Company's cash was $38.0 million and $46.6 million, respectively.
A summary of the Company's cash equivalents and investments as of September 30, 2017 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
2,170

 
$

 
$

 
$
2,170

 
 
 
 
 
 
 
 
 
Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
16,053

 
$

 
$
(42
)
 
$
16,011

Corporate bonds and commercial paper
 
19,911

 

 
(27
)
 
19,884

Certificates of deposit
 
12,822

 

 

 
12,822

 
 
$
48,786

 
$

 
$
(69
)
 
$
48,717

A summary of the Company's 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 condensed 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:
 
 
September 30, 2017
 
December 31, 2016
Due within one year or less
 
$
30,733

 
$
26,577

Due after one year through five years
 
17,984

 
15,672

 
 
$
48,717

 
$
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 condensed 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 September 30, 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 September 30, 2017:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
16,053

 
$
(42
)
 
$
16,011

Corporate bonds and commercial paper
 
19,911

 
(27
)
 
19,884

 
 
$
35,964

 
$
(69
)
 
$
35,895


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

Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets
The carrying amount of goodwill was $12.9 million at September 30, 2017 and December 31, 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. No impairment of goodwill has been recorded to date. Goodwill is deductible for tax purposes in certain jurisdictions.
Intangible assets at September 30, 2017 and December 31, 2016 were as follows:
 
 
As of September 30, 2017
 
As of December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
 
$
3,130

 
$
(1,157
)
 
$
1,973

 
$
3,130

 
$
(749
)
 
$
2,381

Non-compete agreements
 
884

 
(408
)
 
476

 
884

 
(266
)
 
618

Trademarks
 
2,140

 
(1,546
)
 
594

 
2,140

 
(1,010
)
 
1,130

Acquired technology
 
13,293

 
(6,553
)
 
6,740

 
11,920

 
(3,846
)
 
8,074

Assembled workforce
 
121

 
(28
)
 
93

 

 

 

Capitalized software development costs
 
3,975

 
(339
)
 
3,636

 
3,005

 

 
3,005

 
 
$
23,543

 
$
(10,031
)
 
$
13,512

 
$
21,079

 
$
(5,871
)
 
$
15,208


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 condensed consolidated statement of comprehensive loss was $0.9 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and $2.7 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively. Amortization expense included in operating expenses in the condensed consolidated statement of comprehensive loss was $0.4 million for each of the three months ended September 30, 2017 and 2016, and $1.1 million for each of the nine months ended September 30, 2017 and 2016.
Capitalized software development costs were $4.0 million as of September 30, 2017 and $3.0 million as of December 31, 2016. During the first nine months of 2017, all of the products related to capitalized software development costs reached general release, and the Company has commenced amortization of these costs. The Company amortized $0.1 million and $0.3 million of capitalized software development costs for the three and nine months ended September 30, 2017, respectively. 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.
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 our corporate headquarters is now secured by a $1.6 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 $1.1 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and $3.3 million and $2.8 million for the nine months ended September 30, 2017 and 2016, respectively.
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,
 
 
2017 (from October 1 to December 31)
 
$
2,664

2018
 
12,347

2019
 
10,339

2020
 
6,802

2021
 
6,744

Thereafter
 
11,802

Total commitments
 
$
50,698


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.
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 2,080 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 nine months ended September 30, 2017, 66 shares have been transferred to the 2014 Plan from the 2007 Plan, and as of September 30, 2017 a total of 7,297 shares were allocated for issuance under the 2014 Plan. As of September 30, 2017, options to purchase a total of 2,628 shares of common stock have been granted under the 2014 Plan, 2,346 shares have been reserved under the 2014 Plan for the vesting of restricted stock units, 413 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 2,736 shares of common stock remain available for future issuance under the 2014 Plan.
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 September 30, 2017, no 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
Stock option activity during the nine months ended September 30, 2017 was as follows:
 
 
Number of Options
 
Weighted Average Exercise Price
Balance as of January 1, 2017
 
4,434

 
$
12.91

Granted
 
577

 
35.81

Exercised
 
(926
)
 
9.30

Forfeited
 
(178
)
 
19.06

Balance as of September 30, 2017
 
3,907

 
$
16.87


Restricted Stock Units
Restricted stock unit activity during the nine months ended September 30, 2017 was as follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Nonvested as of January 1, 2017
 
1,210

 
$
25.87

Granted
 
860

 
38.55

Vested
 
(306
)
 
26.07

Forfeited
 
(96
)
 
27.87

Nonvested as of September 30, 2017
 
1,668

 
$
32.25

Income Taxes
Income Taxes
Income Taxes
In accordance with applicable accounting guidance, the income tax provision for the three and nine months ended September 30, 2017 is based on the estimated annual effective tax rate for fiscal year 2017. The estimated effective tax rate may be subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year, along with other items that may affect the rate, change.
The Company's provision for income taxes reflected an effective tax rate of approximately 0.1% and 1.0% for the three months ended September 30, 2017 and 2016, respectively, and 1.8% and 1.2% for the nine months ended September 30, 2017 and 2016, respectively. For the three and nine months ended September 30, 2017 and 2016, the Company's effective tax rate was lower than the U.S. federal statutory rate primarily due to changes to its valuation allowance.
The Company has significant deferred tax assets related to its net operating loss carryforwards and tax credits and has provided a valuation allowance for the full amount of its deferred tax assets, as it is not more likely than not that any future benefit from deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards will 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.
The Company increased both its net operating loss deferred tax asset and its valuation allowance by $17.3 million upon adoption of ASU No. 2016-09 relating to certain tax deductions associated with stock option transactions greater than the stock-related compensation expense for financial statement purposes.
The Company had no unrecognized tax benefits as of September 30, 2017. The Company's tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the Company is not currently under examination by any taxing jurisdiction.
Summary of Significant Accounting Policies (Policies)
As used in this report, the terms "we," "us," "our," or the "Company" refer to Q2 Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. These interim unaudited condensed 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 for interim financial statements. The interim unaudited condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
In the Company's opinion, the accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K, filed with the SEC on February 21, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other period.
The preparation of the accompanying interim unaudited condensed 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 interim unaudited condensed 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.
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 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.
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.
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 digital banking 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 September 30, 2017 and December 31, 2016 were unbilled receivables of $2.0 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 September 30, 2017 and December 31, 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 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 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
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 its 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 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.
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 its 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 $0.4 million for each of the three months ended September 30, 2017 and 2016, and $1.2 million for each of the nine months ended September 30, 2017 and 2016. 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 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 a reclassification of 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.
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 condensed 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.
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.
All advertising costs of the Company are expensed the first time the advertising takes place.
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 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 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%.
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 date of grant, and recognizes compensation expense ratably over the requisite service period of the restricted stock unit award.
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 September 30, 2017, the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded.
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. The new revenue standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect recognized as of the date of adoption. The Company plans to adopt the standard using the modified retrospective method.
The Company continues to evaluate all potential impacts of the new standard, as well as the changes that may be 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 or price increases that are dependent upon external factors such as an RCFI's increase in usage. 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 likely 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 likely 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 likely be required to defer additional incremental costs related to the customer contract and amortize those costs over the expected period of customer benefit. The Company also expects a portion of the commission payment to be expensed as incurred. The Company is working to quantify the impact of the new standard on arrangements that include increases in usage, the impact of the deferral of additional incremental costs of obtaining a contract with a customer and the appropriate amortization period for such costs.
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 currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed consolidated financial statements.
Summary of Significant Accounting Policies (Tables)
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
The following table sets forth the computations of net loss per share for the periods listed:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Numerators:
 
 
 
 
 
 
 
 
Net loss
 
$
(5,782
)
 
$
(9,481
)
 
$
(20,643
)
 
$
(28,841
)
Denominators:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
41,386

 
39,870

 
41,030

 
39,445

Net loss per common share, basic and diluted
 
$
(0.14
)
 
$
(0.24
)
 
$
(0.50
)
 
$
(0.73
)
The following table sets forth the anti-dilutive common share equivalents that were excluded for the periods listed:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Stock options and restricted stock units
 
5,575

 
5,981

 
5,575

 
5,981

Fair Value Measurements (Tables)
Schedule of Fair Value Assets Measured on Recurring Basis
The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring basis as of September 30, 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
 
$
2,170

 
$
2,170

 
$

 
$

 
 
 
 
 
 
 
 
 
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
 
$
16,011

 
$

 
$
16,011

 
$

Corporate bonds and commercial paper
 
19,884

 

 
19,884

 

Certificates of deposit
 
12,822

 

 
12,822

 

 
 
$
48,717

 
$

 
$
48,717

 
$


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

 
$

Cash, Cash Equivalents and Investments (Tables)
A summary of the Company's cash equivalents and investments as of September 30, 2017 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
2,170

 
$

 
$

 
$
2,170

 
 
 
 
 
 
 
 
 
Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
16,053

 
$

 
$
(42
)
 
$
16,011

Corporate bonds and commercial paper
 
19,911

 

 
(27
)
 
19,884

Certificates of deposit
 
12,822

 

 

 
12,822

 
 
$
48,786

 
$

 
$
(69
)
 
$
48,717

A summary of the Company's 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 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:
 
 
September 30, 2017
 
December 31, 2016
Due within one year or less
 
$
30,733

 
$
26,577

Due after one year through five years
 
17,984

 
15,672

 
 
$
48,717

 
$
42,249

The following table shows the fair values and the gross unrealized losses of these available-for-sale investments aggregated by investment category as of September 30, 2017:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
16,053

 
$
(42
)
 
$
16,011

Corporate bonds and commercial paper
 
19,911

 
(27
)
 
19,884

 
 
$
35,964

 
$
(69
)
 
$
35,895


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

Goodwill and Intangible Assets (Tables)
Intangible Assets
Intangible assets at September 30, 2017 and December 31, 2016 were as follows:
 
 
As of September 30, 2017
 
As of December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
 
$
3,130

 
$
(1,157
)
 
$
1,973

 
$
3,130

 
$
(749
)
 
$
2,381

Non-compete agreements
 
884

 
(408
)
 
476

 
884

 
(266
)
 
618

Trademarks
 
2,140

 
(1,546
)
 
594

 
2,140

 
(1,010
)
 
1,130

Acquired technology
 
13,293

 
(6,553
)
 
6,740

 
11,920

 
(3,846
)
 
8,074

Assembled workforce
 
121

 
(28
)
 
93

 

 

 

Capitalized software development costs
 
3,975

 
(339
)
 
3,636

 
3,005

 

 
3,005

 
 
$
23,543

 
$
(10,031
)
 
$
13,512

 
$
21,079

 
$
(5,871
)
 
$
15,208

Commitments and Contingencies (Tables)
Contractual Obligation, Fiscal Year Maturity Schedule
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,
 
 
2017 (from October 1 to December 31)
 
$
2,664

2018
 
12,347

2019
 
10,339

2020
 
6,802

2021
 
6,744

Thereafter
 
11,802

Total commitments
 
$
50,698

Stock-Based Compensation (Tables)
Stock option activity during the nine months ended September 30, 2017 was as follows:
 
 
Number of Options
 
Weighted Average Exercise Price
Balance as of January 1, 2017
 
4,434

 
$
12.91

Granted
 
577

 
35.81

Exercised
 
(926
)
 
9.30

Forfeited
 
(178
)
 
19.06

Balance as of September 30, 2017
 
3,907

 
$
16.87

Restricted stock unit activity during the nine months ended September 30, 2017 was as follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Nonvested as of January 1, 2017
 
1,210

 
$
25.87

Granted
 
860

 
38.55

Vested
 
(306
)
 
26.07

Forfeited
 
(96
)
 
27.87

Nonvested as of September 30, 2017
 
1,668

 
$
32.25

Organization and Description of Business (Details) (Q2 Software, Inc.)
Sep. 30, 2017
Q2 Software, Inc.
 
Subsidiary of Limited Liability Company or Limited Partnership [Line Items]
 
Wholly owned subsidiary, ownership percentage
100.00% 
Summary of Significant Accounting Policies (Details) (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Dec. 31, 2016
Sep. 30, 2017
Stock options
Sep. 30, 2017
Stock options
Year One
Sep. 30, 2017
Restricted Stock Units (RSUs)
Sep. 30, 2017
Restricted Stock Units (RSUs)
Year One
Sep. 30, 2017
Restricted Stock Units (RSUs)
Year Two
Sep. 30, 2017
Restricted Stock Units (RSUs)
Year Three
Sep. 30, 2017
Restricted Stock Units (RSUs)
Year Four
Sep. 30, 2017
Computer hardware and equipment
Minimum
Sep. 30, 2017
Computer hardware and equipment
Maximum
Sep. 30, 2017
Purchased software and licenses
Minimum
Sep. 30, 2017
Purchased software and licenses
Maximum
Sep. 30, 2017
Furniture and fixtures
Dec. 31, 2016
One Customer
Accounts Receivable
Customer Concentration Risk
Mar. 31, 2017
Accounting Standards Update 2016-09
Retained Earnings
Property, Plant and Equipment [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Concentration credit risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.00% 
 
Accounts Receivable, Net [Abstract]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unbilled receivables
$ 2,000,000 
 
$ 2,000,000 
 
$ 1,200,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for sales credits
(200,000)
 
(200,000)
 
(200,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated useful life
 
 
 
 
 
 
 
 
 
 
 
 
3 years 
5 years 
3 years 
5 years 
7 years 
 
 
Revenues recorded from out-of-pocket expense reimbursements
400,000 
400,000 
1,200,000 
1,200,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized implementation costs
1,500,000 
1,700,000 
4,200,000 
4,800,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of capitalized software development costs
100,000 
 
300,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software development costs
200,000 
700,000 
1,000,000 
1,900,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising costs
200,000 
100,000 
500,000 
200,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment to stock compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
200,000 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Award vesting rights (percentage)
 
 
 
 
 
 
25.00% 
 
25.00% 
25.00% 
25.00% 
25.00% 
 
 
 
 
 
 
 
Award vesting period
 
 
 
 
 
36 months 
1 year 
4 years 
 
 
 
 
 
 
 
 
 
 
 
Numerators:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$ (5,782,000)
$ (9,481,000)
$ (20,643,000)
$ (28,841,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted (in shares)
41,386 
39,870 
41,030 
39,445 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted (usd per share)
$ (0.14)
$ (0.24)
$ (0.50)
$ (0.73)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock units (in shares)
5,575 
5,981 
5,575 
5,981 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Combinations and Asset Acquisitions (Details) (USD $)
In Millions, unless otherwise specified
1 Months Ended 3 Months Ended 9 Months Ended 6 Months Ended 1 Months Ended
Jan. 31, 2017
Sep. 30, 2017
Sep. 30, 2017
Centrix Solutions, Inc.
Sep. 30, 2016
Centrix Solutions, Inc.
Sep. 30, 2017
Centrix Solutions, Inc.
Sep. 30, 2016
Centrix Solutions, Inc.
Jun. 30, 2017
Social Money
Jan. 31, 2017
Acquired Technology and Assembled Workforce
Business Acquisition [Line Items]
 
 
 
 
 
 
 
 
Cash paid for assets
$ 1.5 
 
 
 
 
 
 
 
Hold-back payable
0.2 
 
 
 
 
 
 
 
Hold-back payable period
12 months 
 
 
 
 
 
 
 
Intangible assets acquired
 
 
 
 
 
 
 
1.5 
Estimated useful life
 
 
 
 
 
 
 
3 years 
Increase in deferred tax liabilities related to intangible assets
 
 
 
 
 
 
 
0.5 
Milestone and retention bonuses
 
 
 
 
7.2 
 
0.2 
 
Release of hold-back deposit
 
2.5 
 
 
 
 
 
 
Compensation expenses included in acquisition related costs
 
 
0.3 
1.8 
1.0 
4.6 
 
 
Decrease in tax valuation allowance related to intangible assets
 
 
 
 
 
 
 
$ (0.5)
Fair Value Measurements (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Fair Value, Measurements, Recurring
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
$ 48,717 
$ 42,249 
Fair Value, Measurements, Recurring |
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Fair Value, Measurements, Recurring |
Significant Other Observable Inputs (Level 2)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
48,717 
42,249 
Fair Value, Measurements, Recurring |
Significant Unobservable Inputs (Level 3)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
U.S. government agency bonds |
Fair Value, Measurements, Recurring
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
16,011 
12,998 
U.S. government agency bonds |
Fair Value, Measurements, Recurring |
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
U.S. government agency bonds |
Fair Value, Measurements, Recurring |
Significant Other Observable Inputs (Level 2)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
16,011 
12,998 
U.S. government agency bonds |
Fair Value, Measurements, Recurring |
Significant Unobservable Inputs (Level 3)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Corporate bonds and commercial paper |
Fair Value, Measurements, Recurring
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
19,884 
14,647 
Corporate bonds and commercial paper |
Fair Value, Measurements, Recurring |
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Corporate bonds and commercial paper |
Fair Value, Measurements, Recurring |
Significant Other Observable Inputs (Level 2)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
19,884 
14,647 
Corporate bonds and commercial paper |
Fair Value, Measurements, Recurring |
Significant Unobservable Inputs (Level 3)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Certificates of deposit |
Fair Value, Measurements, Recurring
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
12,822 
14,604 
Certificates of deposit |
Fair Value, Measurements, Recurring |
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Certificates of deposit |
Fair Value, Measurements, Recurring |
Significant Other Observable Inputs (Level 2)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
12,822 
14,604 
Certificates of deposit |
Fair Value, Measurements, Recurring |
Significant Unobservable Inputs (Level 3)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments
Money market funds
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cash Equivalents
2,170 
8,306 
Money market funds |
Fair Value, Measurements, Recurring
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cash Equivalents
2,170 
8,306 
Money market funds |
Fair Value, Measurements, Recurring |
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cash Equivalents
2,170 
8,306 
Money market funds |
Fair Value, Measurements, Recurring |
Significant Other Observable Inputs (Level 2)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cash Equivalents
Money market funds |
Fair Value, Measurements, Recurring |
Significant Unobservable Inputs (Level 3)
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cash Equivalents
$ 0 
$ 0 
Cash, Cash Equivalents and Investments - Cash Equivalents and Investments (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Sep. 30, 2016
Dec. 31, 2015
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Cash and Cash Equivalents, Amortized Cost
$ 40,140 
$ 54,873 
$ 51,623 
$ 67,049 
Investments, Amortized Cost
48,786 
42,303 
 
 
Investments, Unrealized Gains
 
 
Investments, Unrealized Losses
(69)
(54)
 
 
Investments, Fair Value
48,717 
42,249 
 
 
Cash
 
 
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Cash and Cash Equivalents, Amortized Cost
38,000 
46,600 
 
 
Money market funds
 
 
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Cash and Cash Equivalents, Amortized Cost
2,170 
8,306 
 
 
Investments, Unrealized Gains
 
 
Investments, Unrealized Losses
 
 
Cash and Cash Equivalents, Fair Value
2,170 
8,306 
 
 
U.S. government agency bonds
 
 
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Investments, Amortized Cost
16,053 
13,028 
 
 
Investments, Unrealized Gains
 
 
Investments, Unrealized Losses
(42)
(30)
 
 
Investments, Fair Value
16,011 
12,998 
 
 
Corporate bonds and commercial paper
 
 
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Investments, Amortized Cost
19,911 
14,671 
 
 
Investments, Unrealized Gains
 
 
Investments, Unrealized Losses
(27)
(24)
 
 
Investments, Fair Value
19,884 
14,647 
 
 
Certificates of deposit
 
 
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
 
 
Investments, Amortized Cost
12,822 
14,604 
 
 
Investments, Unrealized Gains
 
 
Investments, Unrealized Losses
 
 
Investments, Fair Value
$ 12,822 
$ 14,604 
 
 
Cash, Cash Equivalents and Investments - Contractual Maturities (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Cash and Cash Equivalents [Abstract]
 
 
Due within one year or less
$ 30,733 
$ 26,577 
Due after one year through five years
17,984 
15,672 
Total
$ 48,717 
$ 42,249 
Cash, Cash Equivalents and Investments - Securities in Continuous Loss Position (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
 
 
Adjusted Cost
$ 35,964 
$ 26,696 
Gross Unrealized Loss
(69)
(54)
Fair Value
35,895 
26,642 
U.S. government agency bonds
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Adjusted Cost
16,053 
13,028 
Gross Unrealized Loss
(42)
(30)
Fair Value
16,011 
12,998 
Corporate bonds and commercial paper
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Adjusted Cost
19,911 
13,668 
Gross Unrealized Loss
(27)
(24)
Fair Value
$ 19,884 
$ 13,644 
Goodwill and Intangible Assets - Narrative (Details) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
operating_segment
reporting_unit
Sep. 30, 2016
Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Goodwill
$ 12,900,000 
 
$ 12,900,000 
 
$ 12,876,000 
Number of operating segments
 
 
 
 
Number of reporting units
 
 
 
 
Impairment of goodwill
 
 
 
 
Amortization of acquired intangibles
369,000 
368,000 
1,113,000 
1,104,000 
 
Capitalized software development costs
4,000,000 
 
4,000,000 
 
3,000,000 
Amortization of capitalized software development costs
100,000 
 
300,000 
 
 
Minimum
 
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Estimated useful life
 
 
2 years 
 
 
Maximum
 
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Estimated useful life
 
 
6 years 
 
 
Maximum |
Capitalized software development costs
 
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Estimated useful life
 
 
5 years 
 
 
Cost of revenues
 
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Amortization of acquired intangibles
900,000 
800,000 
2,700,000 
2,400,000 
 
Operating expenses
 
 
 
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
 
 
 
Amortization of acquired intangibles
$ 400,000 
$ 400,000 
$ 1,100,000 
$ 1,100,000 
 
Goodwill and Intangible Assets - Intangible Assets (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
$ 23,543 
$ 21,079 
Accumulated Amortization
(10,031)
(5,871)
Net Carrying Amount
13,512 
15,208 
Customer relationships
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
3,130 
3,130 
Accumulated Amortization
(1,157)
(749)
Net Carrying Amount
1,973 
2,381 
Non-compete agreements
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
884 
884 
Accumulated Amortization
(408)
(266)
Net Carrying Amount
476 
618 
Trademarks
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
2,140 
2,140 
Accumulated Amortization
(1,546)
(1,010)
Net Carrying Amount
594 
1,130 
Acquired technology
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
13,293 
11,920 
Accumulated Amortization
(6,553)
(3,846)
Net Carrying Amount
6,740 
8,074 
Assembled workforce
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
121 
Accumulated Amortization
(28)
Net Carrying Amount
93 
Capitalized software development costs
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Amount
3,975 
3,005 
Accumulated Amortization
(339)
Net Carrying Amount
$ 3,636 
$ 3,005 
Debt (Details) (2013 Secured Credit Facility, Wells Fargo, USD $)
0 Months Ended 1 Months Ended 0 Months Ended
Apr. 11, 2017
Line of Credit
Mar. 31, 2016
Line of Credit
annual_installment
Oct. 31, 2016
Line of Credit
Mar. 31, 2016
Line of Credit
U.S. Federal Funds Rate
Mar. 31, 2016
Line of Credit
One Month LIBOR
Sep. 30, 2017
Letter of Credit
Line of Credit Facility [Line Items]
 
 
 
 
 
 
Line of credit facility, maximum borrowing capacity
 
$ 25,000,000.0 
$ 25,000,000.0 
 
 
 
Line of credit facility, increase to borrowing capacity (up to)
 
25,000,000.0 
 
 
 
 
Line of credit facility, maximum borrowing capacity as a percentage of the Company's trailing twelve-month recurring revenues
 
75.00% 
 
 
 
 
Basis spread on variable interest rate
 
 
 
1.00% 
1.00% 
 
Line of credit facility, initial closing fee, number of annual installments
 
 
 
 
 
Line of credit facility, initial closing fee, repayment period
 
3 years 
 
 
 
 
Payment of outstanding balance on credit facility
100,000 
 
 
 
 
 
Secured letters of credit amount
 
 
 
 
 
$ 1,600,000 
Commitments and Contingencies - Narrative (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
building
Sep. 30, 2016
Other Commitments [Line Items]
 
 
 
 
Number of buildings occupied
 
 
 
Monthly rent expense under operating lease
$ 1.1 
$ 0.9 
$ 3.3 
$ 2.8 
Lease One
 
 
 
 
Other Commitments [Line Items]
 
 
 
 
Leased square feet
 
 
67,000 
 
Lease renewal term
 
 
5 years 
 
Lease Two
 
 
 
 
Other Commitments [Line Items]
 
 
 
 
Leased square feet
 
 
129,000 
 
Lease renewal term
 
 
10 years 
 
Commitments and Contingencies - Contractual Commitments (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Commitments and Contingencies Disclosure [Abstract]
 
2017 (from October 1 to December 31)
$ 2,664 
2018
12,347 
2019
10,339 
2020
6,802 
2021
6,744 
Thereafter
11,802 
Total commitments
$ 50,698 
Stock-Based Compensation - Narrative (Details)
0 Months Ended 9 Months Ended
Jan. 1, 2017
Sep. 30, 2017
Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
Common stock, granted (in shares)
 
577,000 
 
2014 Stock Plan
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
Shares reserved for future issuance under the plan (in shares)
 
 
2,080,000 
Additional shares authorized under the plan, percentage increase
 
4.50% 
 
Automatic annual increase in shares
1,819,000 
 
 
Shares transferred from the previous plan that expired or terminated (in shares)
 
66,000 
 
Shares allocated for issuance (in shares)
 
7,297,000 
 
Common stock, granted (in shares)
 
2,628,000 
 
Shares available for future issuance under the plan (in shares)
 
2,736,000 
 
2007 Stock Plan
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
Shares available for future issuance under the plan (in shares)
 
 
Restricted Stock Units (RSUs) |
2014 Stock Plan
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
Shares reserved for future issuance under the plan (in shares)
 
2,346,000 
 
Shares transferred from the previous plan that expired or terminated (in shares)
 
413,000 
 
Stock-Based Compensation - Stock Option Activity (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Number of Options
 
Balance as of beginning of period (in shares)
4,434 
Stock options, granted (in shares)
577 
Stock options, exercised (in shares)
(926)
Stock options, forfeited (in shares)
(178)
Balance as of end of period (in shares)
3,907 
Weighted Average Exercise Price
 
Balance at beginning of period (in dollars per share)
$ 12.91 
Granted (in dollars per share)
$ 35.81 
Exercised (in dollars per share)
$ 9.30 
Forfeited (in dollars per share)
$ 19.06 
Balance at end of period (in dollars per share)
$ 16.87 
Stock-Based Compensation - Restricted Stock Activity (Details) (Restricted Stock Units (RSUs), USD $)
In Thousands, except Per Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Restricted Stock Units (RSUs)
 
Number of Shares
 
Nonvested as of beginning of period (in shares)
1,210 
Restricted stock units, granted (in shares)
860 
Restricted stock units, vested (in shares)
(306)
Restricted stock units, forfeited (in shares)
(96)
Nonvested as of end of period (in shares)
1,668 
Weighted Average Grant Date Fair Value
 
Nonvested at beginning of period (in dollars per share)
$ 25.87 
Granted (in dollars per share)
$ 38.55 
Vested (in dollars per share)
$ 26.07 
Forfeited (in dollars per share)
$ 27.87 
Nonvested at end of period (in dollars per share)
$ 32.25 
Income Taxes (Details) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Operating Loss Carryforwards [Line Items]
 
 
 
 
Effective tax rate, percent
0.10% 
1.00% 
1.80% 
1.20% 
Unrecognized tax benefits
$ 0 
 
$ 0 
 
Accounting Standards Update 2016-09
 
 
 
 
Operating Loss Carryforwards [Line Items]
 
 
 
 
Net operating loss deferred tax asset
17,300,000 
 
17,300,000 
 
Increase in tax valuation allowance
$ 17,300,000 
 
$ 17,300,000