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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
| | | | | |
| (Mark One) | |
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| |
| For the quarterly period ended June 30, 2018 | |
| OR | |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For transition period from to | |
| Commission File Number 001-36773 | |
___________________________________
WORKIVA INC.
(Exact name of registrant as specified in its charter)
___________________________________
| | | | | | | | | | | |
Delaware (State or other jurisdiction of incorporation or organization) | | | 47-2509828 (I.R.S. Employer Identification Number) |
2900 University Blvd Ames, IA 50010 (888) 275-3125 | | | |
| (Address of principal executive offices and zip code) | | | |
| (888) 275-3125 | | | |
| (Registrant's telephone number, including area code) | | | |
___________________________________
| | | |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | |
Large accelerated filer o | Accelerated filer ý |
| |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| |
| Emerging growth company ý |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No ý
As of August 3, 2018, there were approximately 33,526,550 shares of the registrant's Class A common stock and 9,786,484 shares of the registrant's Class B common stock outstanding.
WORKIVA INC.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical facts, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, in “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q and in any subsequent filing we make with the SEC, as well as in any documents incorporated by reference that describe risks and factors that could cause results to differ materially from those projected in these forward-looking statements.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or events and circumstances reflected in the forward-looking statements will occur. We are under no duty to update any of these forward-looking statements after completion of this Quarterly Report on Form 10-Q to conform these statements to actual results or revised expectations.
Part I. Financial Information
Item 1. Financial Statements
| | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) | | | |
| As of June 30, 2018 | | As of December 31, 2017 |
| (unaudited) | | |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 57,495 | | $ | 60,333 |
| Marketable securities | 23,216 | | 16,364 |
| Accounts receivable, net of allowance for doubtful accounts of $590 and $388 at June 30, 2018 and December 31, 2017, respectively | 39,088 | | 28,800 |
| Deferred commissions | 4,844 | | 2,376 |
| Other receivables | 801 | | 975 |
Prepaid expenses | 8,229 | | 6,444 |
| Total current assets | 133,673 | | 115,292 |
| | | |
| Property and equipment, net | 39,338 | | 40,444 |
| Deferred commissions, non-current | 6,462 | | — |
| Intangible assets, net | 1,196 | | 1,118 |
| Other assets | 1,025 | | 861 |
| Total assets | $ | 181,694 | | $ | 157,715 |
| | | |
| | | |
| | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except share and per share amounts) | | | |
| As of June 30, 2018 | | As of December 31, 2017 |
| (unaudited) | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
| Current liabilities | | | |
| Accounts payable | $ | 4,688 | | $ | 3,060 |
| Accrued expenses and other current liabilities | 30,979 | | 20,212 |
| Deferred revenue | 118,490 | | 104,684 |
| Deferred government grant obligation | 42 | | 217 |
| Current portion of capital lease and financing obligations | 1,160 | | 1,168 |
| Total current liabilities | 155,359 | | 129,341 |
| | | |
| Deferred revenue, non-current | 21,835 | | 22,709 |
| Deferred government grant obligation | 267 | | 278 |
| Other long-term liabilities | 4,056 | | 3,896 |
| Capital lease and financing obligations | 17,841 | | 18,425 |
| Total liabilities | 199,358 | | 174,649 |
| | | |
| Stockholders’ deficit | | | |
| Class A common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 33,275,738 and 32,165,407 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 33 | | 32 |
| Class B common stock, $0.001 par value per share, 500,000,000 shares authorized, 9,786,484 and 10,203,371 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 10 | | 10 |
| Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding | — | | — |
| Additional paid-in-capital | 270,560 | | 248,289 |
| Accumulated deficit | (288,342) | | (265,337) |
| Accumulated other comprehensive income | 75 | | 72 |
| Total stockholders’ deficit | (17,664) | | (16,934) |
| Total liabilities and stockholders’ deficit | $ | 181,694 | | $ | 157,715 |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited) | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| Revenue | | | | | | | |
| Subscription and support | $ | 48,837 | | $ | 40,980 | | $ | 95,307 | | $ | 80,520 |
| Professional services | 10,293 | | 8,411 | | 23,729 | | 20,775 |
| Total revenue | 59,130 | | 49,391 | | 119,036 | | 101,295 |
| Cost of revenue | | | | | | | |
| Subscription and support | 8,637 | | 7,758 | | 17,439 | | 15,395 |
| Professional services | 7,659 | | 6,528 | | 15,368 | | 13,109 |
| Total cost of revenue | 16,296 | | 14,286 | | 32,807 | | 28,504 |
| Gross profit | 42,834 | | 35,105 | | 86,229 | | 72,791 |
| Operating expenses | | | | | | | |
| Research and development | 20,718 | | 16,239 | | 40,845 | | 31,775 |
| Sales and marketing | 22,252 | | 19,787 | | 43,258 | | 38,500 |
| General and administrative | 21,654 | | 8,943 | | 33,422 | | 18,364 |
| Total operating expenses | 64,624 | | 44,969 | | 117,525 | | 88,639 |
| Loss from operations | (21,790) | | (9,864) | | (31,296) | | (15,848) |
| Interest expense | (449) | | (475) | | (899) | | (930) |
| Other income, net | 492 | | 176 | | 835 | | 788 |
| Loss before provision for income taxes | (21,747) | | (10,163) | | (31,360) | | (15,990) |
| Provision for income taxes | 21 | | 33 | | 26 | | 42 |
| Net loss | $ | (21,768) | | $ | (10,196) | | $ | (31,386) | | $ | (16,032) |
| Net loss per common share: | | | | | | | |
| Basic and diluted | $ | (0.50) | | $ | (0.25) | | $ | (0.73) | | $ | (0.39) |
| Weighted-average common shares outstanding - basic and diluted | 43,234,655 | | 41,429,691 | | 43,048,110 | | 41,270,038 |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited) | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| Net loss | $ | (21,768) | | $ | (10,196) | | $ | (31,386) | | $ | (16,032) |
| Other comprehensive income (loss), net of tax | | | | | | | |
Foreign currency translation adjustment, net of income tax benefit of $0 for both of the three months ended June 30, 2018 and 2017, and net of income tax benefit of $0 and $2 for the six months ended June 30, 2018 and 2017, respectively | 42 | | (52) | | 31 | | (86) |
Unrealized gain (loss) on available-for-sale securities, net of income tax benefit (expense) of $0 for both of the three months ended June 30, 2018 and 2017, and net of income tax (expense) of $0 and ($2) for the six months ended June 30, 2018 and 2017, respectively | 17 | | (2) | | (28) | | — |
| Other comprehensive income (loss), net of tax | 59 | | (54) | | 3 | | (86) |
| Comprehensive loss | $ | (21,709) | | $ | (10,250) | | $ | (31,383) | | $ | (16,118) |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
| | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| Cash flows from operating activities | | | | | | | |
| Net loss | $ | (21,768) | | $ | (10,196) | | $ | (31,386) | | $ | (16,032) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | | | | | | | |
| Depreciation and amortization | 876 | | 867 | | 1,748 | | 1,758 |
| Stock-based compensation expense | 10,465 | | 4,397 | | 16,370 | | 8,536 |
| Provision for doubtful accounts | 139 | | 146 | | 183 | | 432 |
| (Accretion) amortization of premiums and discounts on marketable securities, net | (15) | | 28 | | 3 | | 59 |
| Recognition of deferred government grant obligation | (100) | | (198) | | (208) | | (736) |
| Changes in assets and liabilities: | | | | | | | |
| Accounts receivable | (236) | | (3,228) | | 6,306 | | (542) |
| Deferred commissions | (2,020) | | (149) | | (3,669) | | (151) |
| Other receivables | 148 | | (865) | | 175 | | (25) |
| Prepaid expenses and other | (2,020) | | (2,830) | | (1,789) | | (2,026) |
| Other assets | (110) | | 36 | | (168) | | 13 |
| Accounts payable | (1,294) | | (678) | | 1,383 | | 339 |
| Deferred revenue | 8,747 | | 14,398 | | 6,402 | | 18,494 |
| Accrued expenses and other liabilities | 4,642 | | 2,254 | | 3,887 | | (3,557) |
| Net cash (used in) provided by operating activities | (2,546) | | 3,982 | | (763) | | 6,562 |
| | | | | | | |
| Cash flows from investing activities | | | | | | | |
| Purchase of property and equipment | (210) | | (26) | | (219) | | (147) |
| Purchase of marketable securities | (11,283) | | (2,259) | | (11,283) | | (6,350) |
| Maturities of marketable securities | 3,900 | | 1,850 | | 4,400 | | 4,851 |
| Purchase of intangible assets | (64) | | (58) | | (128) | | (89) |
| Net cash used in investing activities | (7,657) | | (493) | | (7,230) | | (1,735) |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (unaudited)
| | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| Cash flows from financing activities | | | | | | | |
| Proceeds from option exercises | 3,318 | | 4,709 | | 6,393 | | 5,515 |
| Taxes paid related to net share settlements of stock-based compensation awards | (519) | | — | | (1,861) | | (936) |
| Proceeds from shares issued in connection with employee stock purchase plan | — | | — | | 1,370 | | — |
| Repayment of other long-term debt | — | | (20) | | — | | (20) |
| Principal payments on capital lease and financing obligations | (294) | | (490) | | (592) | | (787) |
| Proceeds from government grants | 22 | | 22 | | 22 | | 22 |
| Deferred financing costs | — | | (10) | | — | | (10) |
| Net cash provided by financing activities | 2,527 | | 4,211 | | 5,332 | | 3,784 |
| Effect of foreign exchange rates on cash | (85) | | 82 | | (177) | | 94 |
| | | | | | | |
| Net (decrease) increase in cash and cash equivalents | (7,761) | | 7,782 | | (2,838) | | 8,705 |
| Cash and cash equivalents at beginning of period | 65,256 | | 52,204 | | 60,333 | | 51,281 |
| Cash and cash equivalents at end of period | $ | 57,495 | | $ | 59,986 | | $ | 57,495 | | $ | 59,986 |
| | | | | | | |
| Supplemental cash flow disclosure | | | | | | | |
| Cash paid for interest | $ | 435 | | $ | 448 | | $ | 868 | | $ | 747 |
| Cash paid for income taxes, net of refunds | $ | 54 | | $ | 27 | | $ | 56 | | $ | 40 |
| | | | | | | |
| Supplemental disclosure of noncash investing and financing activities | | | | | | | |
| Allowance for tenant improvements | $ | 105 | | $ | — | | $ | 127 | | $ | — |
| Purchases of property and equipment, accrued but not paid | $ | 254 | | $ | — | | $ | 254 | | $ | — |
See accompanying notes.
WORKIVA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Workiva Inc., a Delaware corporation, and its wholly-owned subsidiaries (the “Company” or “we” or “us”) created Wdesk, an intuitive cloud platform that modernizes how people work within thousands of organizations. Wdesk is built on a data management engine, offering controlled collaboration, data connections, granular permissions and a full audit trail. We offer Wdesk solutions for a wide range of use cases in the following markets: finance and accounting, audit and internal controls, risk and compliance, and performance and management reporting. Our operational headquarters are located in Ames, Iowa, with additional offices located in the United States, Europe, and Canada.
We updated our accounting policies on the use of estimates, revenue recognition, deferred revenue, and deferred commissions as a result of our adopting Financial Accounting Standards Board (FASB) guidance issued in accounting standards codification (ASC) 606, Revenue Recognition - Revenue from Contracts with Customers, under the Accounting Standards Update (ASU) 2014-09 (collectively the new revenue standard). Otherwise, there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 22, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Basis of Presentation and Principles of Consolidation
The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet data as of December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of our financial position and results of operations. The operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results expected for the full year ending December 31, 2018.
Seasonality has affected our revenue, expenses and cash flows from operations. Revenue from professional services has been higher in the first quarter as many of our customers file their Form 10-K in the first calendar quarter. Sales and marketing expense has been higher in the third quarter due to our annual user conference in September. In addition, the timing of the payments of cash bonuses to employees during the first and fourth calendar quarters may result in some seasonality in operating cash flow. The condensed consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on February 22, 2018.
The unaudited condensed consolidated financial statements include the accounts of Workiva Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and various other assumptions believed to be reasonable. These estimates include, but are not limited to, the allowance for doubtful accounts, the determination of the relative selling prices of our services, the measurement of material rights, health insurance claims incurred but not yet reported, valuation of available-for-sale marketable securities, useful lives of deferred contract costs, intangible assets and property and equipment, income taxes and certain assumptions used in the valuation of equity awards. While these estimates are based on our best knowledge of current events and actions that may affect us in the future, actual results may differ materially from these estimates.
Revenue Recognition
We generate revenue through the sale of subscriptions to our cloud-based software and the delivery of professional services. We recognize revenue when control of these services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
• Identification of the contract, or contracts, with a customer
• Identification of the performance obligations in the contract
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the contract
• Recognition of revenue when, or as, we satisfy a performance obligation
We report revenue net of sales and other taxes collected from customers to be remitted to government authorities.
Subscription and Support Revenue
We recognize subscription and support revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are generally three to 36 months in duration, are billed in advance and are non-cancelable. We consider the access to Wdesk and related support services in a customer contract to be a series of distinct services which comprise a single performance obligation because they are substantially the same and have the same pattern of transfer.
Professional Services Revenue and Customer Options
Professional services revenues primarily consist of fees for document set up, XBRL tagging, and consulting with our customers on business processes and best practices for using Wdesk. We have determined that an agreement to purchase these professional services constitutes an option to purchase services in accordance with ASC 606 rather than an agreement that creates enforceable rights and obligations because of the customer's contractual right to cancel services that have not yet been used. In the limited case of agreements where we determined that the option provides the customer with a material right, we allocate a portion of the transaction price to the material right. Professional service agreements that do not contain a material right are accounted for when the customer exercises its option to purchase additional services.
Revenue is recognized for document set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services are recognized as the services are performed.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations in the event that we determine a material right exists. For these contracts, we account for the individual performance obligations separately when they are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. If these criteria are not met, the promised services are accounted for as a combined performance obligation. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors, including the size of our arrangements, length of term, customer demographics and the numbers and types of users within our arrangements.
Deferred Revenue
We typically invoice our customers for subscription and support fees in advance on a quarterly, annual, two- or three-year basis, with payment due at the start of the subscription term. Unpaid invoice amounts for non-cancelable services starting in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that we anticipate will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.
Customer Deposits
As an agreement to purchase professional services constitutes a customer option, fees received in advance of these services being performed are considered customer deposits and are included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. Unpaid invoice amounts for these professional services starting in future periods are excluded from accounts receivable and accrued expenses and other current liabilities.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid where the amortization period is one year or less are expensed as incurred. All other sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our standard contract terms and conditions, rate of technological change and other factors. Amortization expense is included in sales and marketing expense in the accompanying condensed consolidated statements of operations.
Income Taxes
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makes widespread changes to the Internal Revenue Code, including, among other items, the introduction of a new international “Global Intangible Low-Taxed Income” (“GILTI”) regime effective January 1, 2018. Companies may adopt one of two views in regards to establishing deferred taxes in accordance with the new (“GILTI”) regime under ASC 740. Companies may account for the effects of GILTI either (1) in the period the entity becomes subject to GILTI, or (2) establish deferred taxes (similar to the guidance that currently exists with respect to basis
differences that will reverse under current Subpart F rules) for basis differences that upon reversal will be subject to GILTI. We have elected to account for the effects of GILTI in the period incurred and expect to incur an adjustment related to GILTI for the year ended December 31, 2018. This adjustment is offset by a corresponding reduction to the valuation allowance and as a result has zero impact on our effective tax rate. We will continue to refine our calculations as additional guidance is released during the measurement period as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
Recently Adopted Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09, which amends the guidance in former ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Effective January 1, 2018, we adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of our accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The primary impact on accounts receivables and deferred revenue of adopting the new standard relates to recording deferred revenue when payments are due in advance of our performance of subscription based contracts. This recording has resulted in an offsetting increase in accounts receivable and deferred revenue.
The effect of adopting the new standard on accrued expenses and other current liabilities relates to the reclassification of amounts collected in advance related to the purchase of professional services from deferred revenue to accrued expenses and other current liabilities as these agreements to purchase professional services constitute a customer option.
The primary impact of adopting the new standard on our sales and marketing expense relates to the deferral of incremental commission costs of obtaining subscription contracts. Under the previous guidance, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the lesser of 12 months or the non-cancelable term of the customer contract based on the terms of our commission arrangements. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line basis over a period of benefit that we have determined to be three years.
The adoption of ASC 606 primarily resulted in an acceleration of revenue as of December 31, 2017, which in turn reduced our existing deferred tax asset for amounts that had previously been included in deferred revenue. Additionally, the amortization of the costs of obtaining a contract has generated additional deferred tax liabilities that ultimately reduced our net deferred tax asset position. As we have provided a full valuation allowance against our net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this aggregate impact was offset by a corresponding reduction to the valuation allowance.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | Adjustments Due to ASU 2014-09 | | As of January 1, 2018 |
| Assets | | | | | |
| Accounts receivable, net | $ | 28,800 | | $ | 16,900 | | $ | 45,700 |
| Deferred commissions | 2,376 | | 650 | | 3,026 |
| Deferred commissions, non-current | — | | 4,655 | | 4,655 |
| | | | | |
| Liabilities | | | | | |
| Accrued expenses and other current liabilities | 20,212 | | 6,956 | | 27,168 |
| Deferred revenue | 104,684 | | 6,625 | | 111,309 |
| Deferred revenue, non-current | 22,709 | | 243 | | 22,952 |
| | | | | |
| Equity | | | | | |
| Accumulated deficit | $ | (265,337) | | $ | 8,381 | | $ | (256,956) |
In accordance with the new revenue standard requirements, the impact of adoption on our condensed consolidated balance sheet as of June 30, 2018 and statement of operations for the three and six months ended June 30, 2018 was as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| As of June 30, 2018 | | | | |
| As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
| Assets | | | | | |
| Accounts receivable, net | $ | 39,088 | | $ | 27,029 | | $ | 12,059 |
| Deferred commissions | 4,844 | | 2,686 | | 2,158 |
| Deferred commissions, non-current | 6,462 | | — | | 6,462 |
| | | | | |
| Liabilities | | | | | |
| Accrued expenses and other current liabilities | 30,979 | | 24,256 | | 6,723 |
| Deferred revenue | 118,490 | | 116,949 | | 1,541 |
| Deferred revenue, non-current | 21,835 | | 19,877 | | 1,958 |
| | | | | |
| Equity | | | | | |
| Accumulated deficit | $ | (288,342) | | $ | (298,799) | | $ | 10,457 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 | | | | | | Six months ended June 30, 2018 | | | | |
| As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
| Revenues | | | | | | | | | | | |
| Subscription and support | $ | 48,837 | | $ | 48,469 | | $ | 368 | | $ | 95,307 | | $ | 94,706 | | $ | 601 |
| Professional services | 10,293 | | 10,418 | | (125) | | 23,729 | | 25,548 | | (1,819) |
| | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | |
| Sales and marketing | 22,252 | | 23,930 | | (1,678) | | 43,258 | | 46,552 | | (3,294) |
| | | | | | | | | | | |
| Net loss | $ | (21,768) | | $ | (23,689) | | $ | 1,921 | | $ | (31,386) | | $ | (33,462) | | $ | 2,076 |
| | | | | | | | | | | |
| Net loss per common share | | | | | | | | | | | |
| Basic and diluted | $ | (0.50) | | $ | (0.55) | | $ | 0.05 | | $ | (0.73) | | $ | (0.78) | | $ | 0.05 |
The adoption of ASC 606 had no impact on our total cash flows from operations.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Effective January 1, 2018, we adopted this standard. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for nonemployee share-based payment transactions. Under the new guidance, equity-classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to remeasure the awards through performance completion date. Awards that include performance conditions will recognize compensation cost when the achievement of the performance condition is probable, rather than upon achievement of the performance condition. Finally, the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted, including interim periods, but no earlier than the adoption of ASC 606. Effective June 20, 2018, we adopted this standard. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued
ASU 2018-11, Leases (Topic 842): Targeted Improvements that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to elect this new transition guidance when we adopt this standard on January 1, 2019. We have formed a team to identify and analyze our existing lease agreements and have begun assessing our lease population for the new standard and evaluating the impact to our consolidated financial statements. We anticipate the standard will have a material impact on our balance sheet.
2. Supplemental Consolidated Balance Sheet and Statement of Operations Information
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of (in thousands):
| | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Accrued vacation | $ | 6,931 | | $ | 6,087 |
| Accrued commissions | 3,331 | | 3,297 |
| Accrued bonuses | 6,309 | | 4,419 |
| Estimated health insurance claims | 1,120 | | 1,090 |
| ESPP employee contributions | 1,853 | | 1,419 |
| Customer deposits | 6,723 | | — |
| Accrued other liabilities | 4,712 | | 3,900 |
| $ | 30,979 | | $ | 20,212 |
Other Income, net
Other income, net for the three and six months ended June 30, 2018 and 2017 consisted of (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| Interest income | $ | 279 | | $ | 129 | | $ | 502 | | $ | 220 |
| Income from training reimbursement program | 100 | | 198 | | 208 | | 736 |
| Other | 113 | | (151) | | 125 | | (168) |
| $ | 492 | | $ | 176 | | $ | 835 | | $ | 788 |
3. Cash Equivalents and Marketable Securities
At June 30, 2018, marketable securities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| Money market funds | $ | 36,517 | | $ | — | | $ | — | | $ | 36,517 |
| Commercial paper | 9,508 | | — | | — | | 9,508 |
| U.S. treasury debt securities | 1,993 | | — | | (6) | | 1,987 |
| U.S. corporate debt securities | 11,812 | | — | | (91) | | 11,721 |
| $ | 59,830 | | $ | — | | $ | (97) | | $ | 59,733 |
| Included in cash and cash equivalents | $ | 36,517 | | $ | — | | $ | — | | $ | 36,517 |
| Included in marketable securities | $ | 23,313 | | $ | — | | $ | (97) | | $ | 23,216 |
At December 31, 2017, marketable securities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
| Money market funds | $ | 49,452 | | $ | — | | $ | — | | $ | 49,452 |
| U.S. treasury debt securities | 3,083 | | — | | (8) | | 3,075 |
| U.S. corporate debt securities | 13,350 | | — | | (61) | | 13,289 |
| $ | 65,885 | | $ | — | | $ | (69) | | $ | 65,816 |
| Included in cash and cash equivalents | $ | 49,452 | | $ | — | | $ | — | | $ | 49,452 |
| Included in marketable securities | $ | 16,433 | | $ | — | | $ | (69) | | $ | 16,364 |
The following table presents gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of June 30, 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2018 | | | | | | |
| Less than 12 months | | | | 12 months or greater | | |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| U.S. treasury debt securities | $ | 1,987 | | $ | (6) | | $ | — | | $ | — |
| U.S. corporate debt securities | 11,721 | | (91) | | — | | — |
| Total | $ | 13,708 | | $ | (97) | | $ | — | | $ | — |
We do not believe any of the unrealized losses represented an other-than-temporary impairment based on our evaluation of available evidence, which includes our intent as of June 30, 2018 to hold these investments until the cost basis is recovered.
4. Fair Value Measurements
We determine the fair values of our financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 - Inputs are unobservable inputs based on our assumptions.
Financial Assets
Cash equivalents primarily consist of AAA-rated money market funds with overnight liquidity and no stated maturities. We classified cash equivalents as Level 1 due to the short-term nature of these instruments and measured the fair value based on quoted prices in active markets for identical assets.
When available, our marketable securities are valued using quoted prices for identical instruments in active markets. If we are unable to value our marketable securities using quoted prices for identical instruments in active markets, we value our investments using broker reports that utilize quoted market prices for comparable instruments. We validate, on a sample basis, the derived prices provided by the brokers by comparing their assessment of the fair values of our investments against the fair values of the portfolio balances of another third-party professional pricing service. As of June 30, 2018, all of our marketable securities were valued using quoted prices for comparable instruments in active markets and are classified as Level 2.
Based on our valuation of our money market funds and marketable securities, we concluded that they are classified in either Level 1 or Level 2 and we have no financial assets measured using Level 3 inputs. The following table presents information about our assets that are measured at fair value on a recurring basis using the above input categories (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of June 30, 2018 | | | | | | Fair Value Measurements as of December 31, 2017 | | | | |
| Description | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
| Money market funds | | $ | 36,517 | | $ | 36,517 | | $ | — | | $ | 49,452 | | $ | 49,452 | | $ | — |
| Commercial paper | | 9,508 | | — | | 9,508 | | — | | — | | — |
| U.S. treasury debt securities | | 1,987 | | — | | 1,987 | | 3,075 | | — | | 3,075 |
| U.S. corporate debt securities | | 11,721 | | — | | 11,721 | | 13,289 | | — | | 13,289 |
| | $ | 59,733 | | $ | 36,517 | | $ | 23,216 | | $ | 65,816 | | $ | 49,452 | | $ | 16,364 |
| | | | | | | | | | | | |
| Included in cash and cash equivalents | | $ | 36,517 | | | | | | $ | 49,452 | | | | |
| Included in marketable securities | | $ | 23,216 | | | | | | $ | 16,364 | | | | |
5. Deferred Costs
Deferred costs, which primarily consist of costs to obtain contracts with customers, were $11.3 million as of June 30, 2018. Amortization expense for the deferred costs was $2.4 million and $4.4 million for the three and six months ended June 30, 2018, respectively. There was no significant impairment loss in relation to the costs capitalized for the periods presented.
6. Commitments and Contingencies
Lease Commitments
As of June 30, 2018, future estimated minimum lease payments under non-cancelable operating leases were as follows (in thousands):
| | | | | |
| Operating Leases |
| Remainder of 2018 | $ | 2,131 |
| 2019 | 3,517 |
| 2020 | 3,270 |
| 2021 | 3,211 |
| 2022 | |