Edgar Filing: WORKIVA INC

Document

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 March 31, 2019
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 every Interactive Data File required to be submitted 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 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 ý			Accelerated filer o

Non-accelerated filer o			Smaller reporting company o

			Emerging growth company o

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. o

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 April 29, 2019, there were approximately 35,733,931 shares of the registrant's Class A common stock and 9,425,596 shares of the registrant's Class B common stock outstanding.

WORKIVA INC.

TABLE OF CONTENTS


		Page
	Part I. Financial Information
Item 1.	Unaudited Consolidated Financial Statements:	1
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018	4
	Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	31
Item 4.	Controls and Procedures	31

	Part II. Other Information
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34
	Signatures	S-1

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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, 2018, 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.

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Part I. Financial Information

Item 1. Financial Statements


WORKIVA INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
	As of March 31, 2019		As of December 31, 2018
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	78,736	$	77,584
Marketable securities	35,668		20,764
Accounts receivable, net of allowance for doubtful accounts of $769 and $956 at March 31, 2019 and December 31, 2018, respectively	50,560		65,107
Deferred commissions	9,500		8,178
Other receivables	1,395		1,181
Prepaid expenses	7,656		4,417
Total current assets	183,515		177,231

Property and equipment, net	41,049		41,468
Operating lease right-of-use assets	17,057		—
Deferred commissions, non-current	11,296		10,569
Intangible assets, net	1,322		1,266
Other assets	2,042		577
Total assets	$	256,281	$	231,111

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WORKIVA INC. CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share and per share amounts)

	As of March 31, 2019		As of December 31, 2018
	(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	3,182	$	5,461
Accrued expenses and other current liabilities	33,416		36,353
Deferred revenue	149,943		148,545
Current portion of financing obligations	1,253		1,222
Total current liabilities	187,794		191,581

Deferred revenue, non-current	25,933		25,171
Other long-term liabilities	969		6,891
Operating lease liabilities, non-current	20,846		—
Financing obligations, non-current	16,883		17,208
Total liabilities	252,425		240,851

Stockholders’ equity (deficit)
Class A common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 35,695,049 and 34,498,391 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	36		34
Class B common stock, $0.001 par value per share, 500,000,000 shares authorized, 9,425,596 and 9,545,596 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	9		10
Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding	—		—
Additional paid-in-capital	318,151		297,145
Accumulated deficit	(314,490)		(307,027)
Accumulated other comprehensive income	150		98
Total stockholders’ equity (deficit)	3,856		(9,740)
Total liabilities and stockholders’ equity (deficit)	$	256,281	$	231,111

See accompanying notes.

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WORKIVA INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (unaudited)
	Three months ended March 31,
	2019		2018
Revenue
Subscription and support	$	56,123	$	46,470
Professional services	13,840		13,436
Total revenue	69,963		59,906
Cost of revenue
Subscription and support	9,809		8,802
Professional services	9,727		7,709
Total cost of revenue	19,536		16,511
Gross profit	50,427		43,395
Operating expenses
Research and development	22,011		20,127
Sales and marketing	25,365		21,006
General and administrative	10,383		11,768
Total operating expenses	57,759		52,901
Loss from operations	(7,332)		(9,506)
Interest expense	(440)		(450)
Other income, net	320		343
Loss before provision for income taxes	(7,452)		(9,613)
Provision for income taxes	11		5
Net loss	$	(7,463)	$	(9,618)
Net loss per common share:
Basic and diluted	$	(0.17)	$	(0.22)
Weighted-average common shares outstanding - basic and diluted	45,229,279		42,858,756

See accompanying notes.

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WORKIVA INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited)
	Three months ended March 31,
	2019		2018
Net loss	$	(7,463)	$	(9,618)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment, net of income tax benefit (expense) of ($3) and $0 for the three months ended March 31, 2019 and 2018, respectively	9		(11)
Unrealized gain (loss) on available-for-sale securities, net of income tax benefit (expense) of ($15) and $0 for the three months ended March 31, 2019 and 2018, respectively	43		(45)
Other comprehensive income (loss), net of tax	52		(56)
Comprehensive loss	$	(7,411)	$	(9,674)

See accompanying notes.

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WORKIVA INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) (unaudited)

	Three months ended March 31, 2019
	Common Stock (Class A and B)
	Shares	Amount		Additional Paid-in-Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders' Equity (Deficit)
Balances at December 31, 2018	44,044	$	44	$	297,145	$	98	$	(307,027)	$	(9,740)
Stock-based compensation expense	—	—		8,193		—		—		8,193
Issuance of common stock upon exercise of stock options	961	1		11,054		—		—		11,055
Issuance of common stock under employee stock purchase plan	101	—		2,149		—		—		2,149
Issuance of restricted stock units	25	—		—		—		—		—
Tax withholdings related to net share settlements of stock-based compensation awards	(10)	—		(390)		—		—		(390)
Net loss	—	—		—		—		(7,463)		(7,463)
Other comprehensive income	—	—		—		52		—		52
Balances at March 31, 2019	45,121	$	45	$	318,151	$	150	$	(314,490)	$	3,856

	Three months ended March 31, 2018
	Common Stock (Class A and B)
	Shares	Amount		Additional Paid-in-Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders' Deficit
Balances at December 31, 2017	42,369	$	42	$	248,289	$	72	$	(265,337)	$	(16,934)
Cumulative-effect adjustment in connection with the adoption of ASU 2014-09	—	—		—		—		8,381		8,381
Stock-based compensation expense	—	—		5,905		—		—		5,905
Issuance of common stock upon exercise of stock options	296	1		3,075		—		—		3,076
Issuance of common stock under employee stock purchase plan	80	—		1,370		—		—		1,370
Issuance of restricted stock units	9	—		—		—		—		—
Tax witholdings related to net share settlements of stock-based compensation awards	(61)	—		(1,342)		—		—		(1,342)
Net loss	—	—		—		—		(9,618)		(9,618)
Other comprehensive loss	—	—		—		(56)		—		(56)
Balances at March 31, 2018	42,693	$	43	$	257,297	$	16	$	(266,574)	$	(9,218)

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WORKIVA INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
	Three months ended March 31,
	2019		2018
Cash flows from operating activities
Net loss	$	(7,463)	$	(9,618)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	903		872
Stock-based compensation expense	8,193		5,905
(Recovery of) provision for doubtful accounts	(187)		44
(Accretion) amortization of premiums and discounts on marketable securities, net	(81)		18

Deferred income tax	(18)		—
Changes in assets and liabilities:
Accounts receivable	14,818		6,542
Deferred commissions	(2,029)		(1,649)
Operating lease right-of-use asset	668		—
Other receivables	(214)		27
Prepaid expenses and other	(3,236)		231
Other assets	(1,464)		(58)
Accounts payable	(1,562)		2,677
Deferred revenue	1,987		(2,345)
Operating lease liability	(655)		—
Accrued expenses and other liabilities	(4,541)		(863)
Net cash provided by operating activities	5,119		1,783

Cash flows from investing activities
Purchase of property and equipment	(1,743)		(9)
Purchase of marketable securities	(22,155)		—
Maturities of marketable securities	7,390		500
Purchase of intangible assets	(84)		(64)
Net cash (used in) provided by investing activities	(16,592)		427

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WORKIVA INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands) (unaudited)
	Three months ended March 31,
	2019		2018
Cash flows from financing activities
Proceeds from option exercises	11,055		3,075
Taxes paid related to net share settlements of stock-based compensation awards	(390)		(1,342)
Proceeds from shares issued in connection with employee stock purchase plan	2,149		1,370

Principal payments on capital lease and financing obligations	(294)		(298)



Net cash provided by financing activities	12,520		2,805
Effect of foreign exchange rates on cash	105		(92)

Net increase in cash and cash equivalents	1,152		4,923
Cash and cash equivalents at beginning of period	77,584		60,333
Cash and cash equivalents at end of period	$	78,736	$	65,256

Supplemental cash flow disclosure
Cash paid for interest	$	464	$	433
Cash paid for income taxes, net of refunds	$	233	$	2

Supplemental disclosure of noncash investing and financing activities
Allowance for tenant improvements	$	—	$	22
Purchases of property and equipment, accrued but not paid	$	—	$	175

See accompanying notes.

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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”) is a leading provider of cloud-based solutions for connected data, reporting and compliance. Our platform, Wdesk, is used by thousands of public and private companies, government agencies and higher-education institutions. Wdesk offers controlled collaboration, data linking, data integrations, granular permissions, process management and a full audit trail. We sell to customers in the areas of: finance and accounting; risk and controls; regulatory reporting; financial close, management and performance reporting; and statutory and corporate tax reporting. Our operational headquarters are located in Ames, Iowa, with additional offices located in the United States, Europe, the Asia-Pacific region and Canada.

We updated our accounting policies on the use of estimates, impairment of long-lived assets and leases as a result of our adopting Financial Accounting Standards Board (FASB) guidance issued in accounting standards codification (ASC) 842, Leases, under the Accounting Standards Update (ASU) 2016-02 (collectively the new lease 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, 2018, filed with the SEC on February 20, 2019, 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, 2018 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 months ended March 31, 2019 are not necessarily indicative of the results expected for the full year ending December 31, 2019.

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, 2018 filed with the SEC on February 20, 2019.

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. Additionally, certain prior period amounts have been reclassified for consistency with the current year presentation. The reclassification of the prior period amounts were not material to the previously reported consolidated financial statements.

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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, discount rates used in the valuation of right-of-use assets and lease liabilities, 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.

Impairment of Long-Lived Assets

Long-lived assets, such as property, equipment, right-of-use assets and software and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If circumstances require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. We currently have no finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of 12 months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.

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In February 2016, the Financial Accounting Standards Board ("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 (with the exception of short-term leases).

In July 2018, the FASB issued an update (ASU 2018-11) to the existing transition guidance that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Effective January 1, 2019, we adopted ASC 842 using this new transition guidance. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.

We have elected to use the package of practical expedients, which allows us to not (1) reassess whether any expired or existing contracts are considered or contain leases; (2) reassess the lease classification for any expired or existing leases; and (3) reassess the initial direct costs for any existing leases. We did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.

Adoption of the new standard had a material impact on our condensed consolidated balance sheets. The most significant impacts related to the recognition of right-of-use assets and lease liabilities for operating leases. The adoption of ASC 842 had no impact on our condensed consolidated statements of operations or total cash flows from operations.

The cumulative effect of the changes made to our consolidated January 1, 2019 balance sheet for the adoption of ASC 842 were as follows (in thousands):


	As of December 31, 2018		Adjustments due to ASC 842 adoption		As of January 1, 2019
Assets
Operating right-of-use asset	$	—	$	15,694	$	15,694

Liabilities
Accrued expenses and other current liabilities	36,353		2,319		38,672
Other long-term liabilities	6,891		(6,007)		884
Operating lease liabilities, non-current	—		19,382		19,382

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model that reflects probable losses rather than the incurred loss model for recognizing credit losses. The standard will become effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We plan to adopt this standard on the effective date and are currently evaluating the impact of this new standard on our consolidated financial statements.

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In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. The update will become effective for interim and annual periods beginning after December 15, 2019 and may be adopted either retrospectively or prospectively. Early adoption is permitted. We plan to adopt this standard prospectively. We are currently evaluating the impact that adoption of this ASU will have on our consolidated financial statements and whether or not to early adopt.

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):


	March 31, 2019		December 31, 2018
Accrued vacation	$	7,592	$	6,906
Accrued commissions	3,704		7,265
Accrued bonuses	3,729		5,643
Estimated health insurance claims	1,050		1,100
ESPP employee contributions	1,510		2,156
Customer deposits	7,364		7,395
Operating lease liabilities	2,740		—
Accrued other liabilities	5,727		5,888
	$	33,416	$	36,353

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3. Cash Equivalents and Marketable Securities

At March 31, 2019, marketable securities consisted of the following (in thousands):


	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Fair Value
Money market funds	$	55,217	$	—	$	—	$	55,217
Commercial paper	7,483		—		—		7,483
U.S. treasury debt securities	3,917		1		—		3,918
U.S. corporate debt securities	24,278		19		(30)		24,267
	$	90,895	$	20	$	(30)	$	90,885
Included in cash and cash equivalents	$	55,217	$	—	$	—	$	55,217
Included in marketable securities	$	35,678	$	20	$	(30)	$	35,668

At December 31, 2018, marketable securities consisted of the following (in thousands):


	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Fair Value
Money market funds	$	52,068	$	—	$	—	$	52,068
Commercial paper	7,448		—		—		7,448
U.S. treasury debt securities	2,494		—		(1)		2,493
U.S. corporate debt securities	10,890		—		(67)		10,823
	$	72,900	$	—	$	(68)	$	72,832
Included in cash and cash equivalents	$	52,068	$	—	$	—	$	52,068
Included in marketable securities	$	20,832	$	—	$	(68)	$	20,764

The following table presents gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of March 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):


	As of March 31, 2019
	Less than 12 months						12 months or greater
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. treasury debt securities	$	—	$	—	$	—	$	—
U.S. corporate debt securities	4,980		(1)		5,479		(29)
Total	$	4,980	$	(1)	$	5,479	$	(29)

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 March 31, 2019 to hold these investments until the cost basis is recovered.

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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 March 31, 2019, 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 March 31, 2019										Fair Value Measurements as of December 31, 2018
Description	Total		Level 1		Level 2		Total		Level 1		Level 2
Money market funds	$	55,217	$	55,217	$	—	$	52,068	$	52,068	$	—
Commercial paper	7,483		—		7,483		7,448		—		7,448
U.S. treasury debt securities	3,918		—		3,918		2,493		—		2,493
U.S. corporate debt securities	24,267		—		24,267		10,823		—		10,823
	$	90,885	$	55,217	$	35,668	$	72,832	$	52,068	$	20,764

Included in cash and cash equivalents	$	55,217					$	52,068
Included in marketable securities	$	35,668					$	20,764

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5. Leases

Operating Leases

We lease certain office and residential space under non-cancelable operating leases with various lease terms through June 2043. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain office leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 5 years. The exercise of lease renewal options is at our sole discretion and is generally excluded from the lease term at lease inception. Our leases generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs in addition to a base or fixed rent.

The components of lease expense were as follows (in thousands):


	Three months ended March 31, 2019
Operating lease cost	$	925
Short-term lease cost	239
Variable lease cost	203
	$	1,367

Other supplemental information related to leases was as follows (dollar amounts in thousands):


	Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	960
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,033
Weighted Average Remaining Lease Term (in years)
Operating leases	8.2
Weighted Average Discount Rate
Operating leases	5.7		%

As of March 31, 2019, future estimated minimum lease payments under non-cancelable operating leases were as follows (in thousands):


	Operating Leases
Remainder of 2019	$	3,011
2020	4,193
2021	4,233
2022	3,867
2023	3,536
Thereafter	11,255
Total minimum lease payments	30,095
Less: Amount representing interest	(6,509)
Total	$	23,586

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As of March 31, 2019, we did not have additional operating or financing leases that had not yet commenced.

6. Commitments and Contingencies

Litigation

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We evaluate the development of legal matters on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of any currently pending legal proceedings to which we are a party will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

7. Stock-Based Compensation

We grant stock-based incentive awards to attract, motivate and retain qualified employees, non-employee directors and consultants, and to align their financial interests with those of our stockholders. We utilize stock-based compensation in the form of restricted stock awards, restricted stock units, options to purchase Class A common stock and Employee Stock Purchase Plan (“ESPP”) purchase rights.

As of March 31, 2019, awards outstanding under the 2009 Plan consisted of stock options, and awards outstanding under the 2014 Plan consisted of stock options and restricted stock units.

As of March 31, 2019, 2,521,272 shares of Class A common stock were available for grant under the 2014 Plan.

Our ESPP became effective on June 13, 2017. Under the ESPP, eligible employees are granted options to purchase shares of Class A common stock at the lower of 85% of the fair market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. Options to purchase shares are granted twice yearly on or about January 15 and July 15 and are exercisable on or about the succeeding July 14 and January 14, respectively, of each year. As of March 31, 2019, 4,719,674 shares of Class A common stock were available for issuance under the ESPP. No participant may purchase more than $12,500 worth of common stock in a six-month offering period.

Stock-Based Compensation Expense

Stock-based compensation expense was recorded in the following cost and expense categories consistent with the respective employee or service provider’s related cash compensation (in thousands):


	Three months ended March 31,
	2019		2018
Cost of revenue
Subscription and support	$	357	$	171
Professional services	409		150
Operating expenses
Research and development	1,900		1,021
Sales and marketing	1,964		1,113
General and administrative	3,563		3,450
Total	$	8,193	$	5,905

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Stock Options

The following table summarizes the option activity under the Plans for the three months ended March 31, 2019:


	Options	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
					(in thousands)
Outstanding at December 31, 2018	6,400,175	$	13.65	6.1	$	142,340
Granted	—	—
Forfeited	(9,153)	16.65
Exercised	(960,802)	11.51
Outstanding at March 31, 2019	5,430,220	$	14.02	6.1	$	199,157

Exercisable at March 31, 2019	4,330,467	$	13.34	5.7	$	161,785

Options to purchase Class A common stock generally vest over a three- or four-year period and are generally granted for a term of ten years. The total intrinsic value of options exercised during the three months ended March 31, 2019 and 2018 was $34.3 million and $3.6 million, respectively.

No options were granted during the three months ended March 31, 2019 and 2018. The total fair value of options vested during the three months ended March 31, 2019 and 2018 was approximately $2.7 million and $4.6 million, respectively. Total unrecognized compensation expense of $6.9 million related to options will be recognized over a weighted-average period of 1.8 years.

Restricted Stock Units

Restricted stock units granted to employees generally vest over a three- or four-year period in equal, annual installments or with three-year cliff vesting. Restricted stock units granted to non-employee members of our Board of Directors generally have one-year cliff vesting from the date of grant. The recipient of a restricted stock unit award under the Plan will have no rights as a stockholder until share certificates are issued by us, but, at the discretion of our Compensation Committee, has the right to receive a dividend equivalent payment in the form of additional restricted stock units. Additionally, until the shares are issued, they have no voting rights and may not be bought or sold. The fair value for restricted stock units is calculated based on the stock price on the date of grant. The total fair value of restricted stock units vested during the three months ended March 31, 2019 and 2018 was approximately $4.3 million and $3.0 million, respectively.

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The following table summarizes the restricted stock unit activity under the Plan for the three months ended March 31, 2019:


	Number of Shares	Weighted- Average Grant Date Fair Value

Unvested at December 31, 2018	2,359,261	$	23.95
Granted	613,889	39.24
Forfeited	(25,238)	26.43
Vested⁽¹⁾	(247,419)	17.50
Unvested at March 31, 2019	2,700,493	$	27.99

(1) As of March 31, 2019, recipients of 222,614 shares had elected to defer settlement of the vested restricted stock units in accordance with our Nonqualified Deferred Compensation Plan resulting in total deferred units of 777,235 as of March 31, 2019.

Compensation expense associated with unvested restricted stock units is recognized on a straight-line basis over the vesting period. At March 31, 2019, there was approximately $58.7 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted-average period of 2.5 years.

Employee Stock Purchase Plan

The fair value of each share issued under the ESPP is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on the historical volatility of our common stock. The expected term represents the period of time the ESPP purchase rights are expected to be outstanding. The expected term for the ESPP purchase rights approximates the offering period. The risk-free interest rate is based on yields on U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) with a maturity similar to the estimated expected term of the ESPP purchase rights.

The fair value of our ESPP purchase rights was estimated assuming no expected dividends and the following weighted-average assumptions:


	Three months ended March 31,
	2019	2018
Expected term (in years)	0.5	0.5
Risk-free interest rate	2.6%	1.8%
Expected volatility	48.6%	22.2%

During the three months ended March 31, 2019, 100,949 shares of common stock were purchased under the ESPP at a weighted-average price of $21.29 per share, resulting in cash proceeds of $2.1 million.

Compensation expense associated with ESPP purchase rights is recognized on a straight-line basis over the vesting period. At March 31, 2019, there was approximately $580,000 of total unrecognized compensation expense related to the ESPP, which is expected to be recognized over a weighted-average period of 0.3 years.

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8. Revenue Recognition

Disaggregation of Revenue

The following table presents our revenues disaggregated by industry (in thousands). Certain prior year amounts have been reclassified to conform with current period presentation. These reclassifications have no impact on total revenue.


	Three months ended March 31,
	2019		2018
Information technology	$	9,162	$	7,359
Consumer discretionary	7,979		6,851
Industrials	7,792		6,872
Diversified financials	7,438		6,898
Banks	6,678		5,843
Healthcare	6,584		5,344
Energy	5,644		4,852
Other	18,686		15,887
Total revenues	$	69,963	$	59,906

The following table presents our revenues disaggregated by type of good or service (in thousands):


	Three months ended March 31,
	2019		2018
Subscription and support	$	56,123	$	46,470
XBRL professional services	11,410		9,852
Other services	2,430		3,584
Total revenues	$	69,963	$	59,906

Deferred Revenue

During the three months ended March 31, 2019, we recognized $51.3 million of revenue that was included in the deferred revenue balance at the beginning of the period.

Transaction Price Allocated to the Remaining Performance Obligations

As of March 31, 2019, revenue of approximately $180.7 million is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize approximately $151.3 million of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

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9. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including our outstanding stock options, stock related to unvested restricted stock units, and common stock issuable pursuant to the ESPP to the extent dilutive. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive.

The net loss per share is allocated based on the participation rights of the Class A and Class B common shares as if the loss for the year has been distributed. As the liquidation and dividend rights are identical, the net loss is allocated on a proportionate basis.

A reconciliation of the denominator used in the calculation of basic and diluted loss per share is as follows (in thousands, except share and per share data):


	Three months ended
	March 31, 2019						March 31, 2018
	Class A		Class B		Class A		Class B
Numerator
Net loss	$	(5,898)	$	(1,565)	$	(7,330)	$	(2,288)

Denominator
Weighted-average common shares outstanding - basic and diluted	35,746,572		9,482,707		32,662,318		10,196,438
Basic and diluted net loss per share	$	(0.17)	$	(0.17)	$	(0.22)	$	(0.22)

The anti-dilutive securities excluded from the weighted-average shares used to calculate the diluted net loss per common share were as follows:


	As of
	March 31, 2019	March 31, 2018
Shares subject to outstanding common stock options	5,430,220	7,807,606
Shares subject to unvested restricted stock units	2,700,493	1,917,048
Shares issuable pursuant to the ESPP	92,664	107,764

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2019. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, 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.

Overview

Workiva is a leading provider of cloud-based solutions for connected data, reporting and compliance. Our platform, Wdesk, is used by thousands of public and private companies, government agencies and higher-education institutions. Wdesk offers controlled collaboration, data linking, data integrations, granular permissions, process management and a full audit trail. Wdesk users are able to combine narrative with their data, which greatly improves insight in their financial, regulatory and management reporting processes. As of March 31, 2019, 3,366 organizations, including more than 75% of Fortune 500^® companies, subscribed to our Wdesk platform.⁽¹⁾

(1) Claim not confirmed by FORTUNE or Fortune Media IP Limited. FORTUNE^® and FORTUNE 500^® are registered trademarks of Fortune Media IP Limited and are used under license. FORTUNE and Fortune Media IP Limited are not affiliated with, and do not endorse products or services of, Workiva Inc.

Our customers can connect Wdesk with data in more than 100 cloud and on-premise applications. In June 2018, we expanded our Wdesk platform with Wdata, which combines new data preparation capabilities with existing connectors and Application Programming Interfaces (APIs) to help our customers more easily capture, enrich and connect large datasets to Wdesk. Integrating enterprise business systems with our platform removes manual steps in the reporting and analysis process after the data leaves our customers' Enterprise Resource Planning (ERP) and other data systems and enables data assurance throughout the entire reporting process with an immutable audit trail. Wdata also enables a broader set of business users to explore complex data at scale and better manage data transformations in the office of the CFO.

Although our customers employ Workiva solutions for hundreds of different use cases, we currently focus our sales and marketing resources in five areas: finance and accounting; risk and controls; regulatory reporting; financial close, management and performance reporting; and statutory and corporate tax reporting.

We operate our business on a Software-as-a-Service (SaaS) model. Customers enter into quarterly, annual and multi-year subscription contracts to gain access to Wdesk. Our subscription fee includes the use of our software and technical support. Prior to the third quarter of 2018, our subscription pricing was based primarily on the number of corporate entities, number of users, level of customer support and length of contract. Thereafter, we began converting existing customer orders to, and signing new orders primarily based on, a solution-based licensing model. Under this new model, operating metrics related to a customer's expected use of each solution determine the price. We expect a substantial majority of our subscription revenue will be priced on solution-based licensing by mid-2020. We charge customers additional fees primarily for document setup and XBRL tagging services.

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We generate sales primarily through our direct sales force and, to a lesser extent, our customer success and professional services teams. In addition, we augment our direct sales channel with partnerships. Our advisory and service partners offer a wider range of domain and functional expertise that broadens the capabilities of Wdesk, bringing scale and support to customers and prospects. Our technology partners enable more data and process integrations to help customers connect critical transactional systems directly to Wdesk, which becomes a central repository of trusted data, with powerful linking, auditability and control features.

Our integrated platform, subscription-based model and exceptional customer support have contributed to a low rate of customer turnover while achieving strong revenue growth. Our subscription and support revenue retention rate was 95.7% (excluding add-on seats) for the twelve months ended March 31, 2019.

We continue to invest in the development of our solutions, infrastructure and sales and marketing to drive long-term growth. Our full-time employee headcount expanded to 1,357 at March 31, 2019 from 1,313 at March 31, 2018, an increase of 3.4%.

We have achieved significant revenue growth in recent periods. Our revenue grew to $70.0 million during the three months ended March 31, 2019 from $59.9 million during the three months ended March 31, 2018, an increase of 16.8%. We incurred net losses of $7.5 million and $9.6 million during the three months ended March 31, 2019 and March 31, 2018, respectively.

Key Factors Affecting Our Performance

Generate Growth From Existing Customers. Wdesk can exhibit a powerful network effect within an enterprise, meaning that the usefulness of our platform attracts additional users and more data. Since solution-based licensing offers our customers an unlimited number of seats for each solution purchased, we expect customers to add more seats in Wdesk over time. As more employees in an enterprise use Wdesk, additional opportunities for collaboration and automation drive demand among their colleagues for additional solutions. Furthermore, converting customer contracts to solution-based licensing typically generates a one-time increase in contract value for each solution.

Pursue New Customers. Our first software solution enabled customers to streamline and automate their SEC regulatory filing process. In 2013, we began expanding into additional markets that were faced with managing large, complex processes with many contributors and disparate sets of business data. We currently sell to new customers in the areas of finance and accounting; risk and controls; regulatory reporting; financial close, management and performance reporting; and statutory and corporate tax reporting. We intend to continue to build our sales and marketing organization and leverage our brand equity to attract new customers.

Offer More Solutions. We intend to introduce new solutions to continue to meet growing demand for our Wdesk platform. Our close and trusted relationships with our customers are a source for new use cases, features and solutions. We have a disciplined process for tracking, developing and releasing new solutions that are designed to have immediate, broad applicability; a strong value proposition; and a high return on investment for both Workiva and our customers. Our advance planning team assesses customer needs, conducts industry-based research and defines new markets. This vetting process involves our sales, product marketing, customer success, professional services, research and development, finance and senior management teams.

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Expand Across Enterprises. Our success in delivering multiple solutions has created demand from customers for a broader-based, enterprise-wide Wdesk platform. In response, we have been improving our technology and realigning sales and marketing to capitalize on our growing enterprise-wide opportunities. We believe this expansion will add seats and revenue and continue to support our high revenue retention rates. However, we expect that enterprise-wide deals will be larger and more complex, which tend to lengthen the sales cycle.

Add Partners. We continue to add partners. Our consulting and accounting partners offer a broader range of services that leverage the capabilities of Wdesk. Our technology partners enable data connections and process integrations to further streamline critical business functions as we capitalize on growing demand for Wdesk to address broader-based, enterprise-wide opportunities.

Investment in growth. We plan to continue to invest in the development of our Wdesk platform to enhance our current offerings and build new features. In addition, we expect to continue to invest in our sales, marketing, professional services and customer success organizations to drive additional revenue and support the needs of our growing customer base and to take advantage of opportunities that we have identified in EMEA, statutory reporting, audit management and other use cases.

Seasonality. Our revenue from professional services has some degree of seasonality. Many of our customers employ our professional services just before they file their Form 10-K, often in the first calendar quarter. Our sales and marketing expense also has some degree of seasonality. Sales and marketing expense is generally higher in the third quarter since we hold 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.

Key Performance Indicators


	Three months ended March 31,
	2019			2018

	(dollars in thousands)
Financial metrics
Total revenue	$	69,963		$	59,906
Percentage increase in total revenue	16.8		%	15.4		%
Subscription and support revenue	$	56,123		$	46,470
Percentage increase in subscription and support revenue	20.8		%	17.5		%
Subscription and support as a percent of total revenue	80.2		%	77.6		%


	As of March 31,
	2019	2018
Operating metrics
Number of customers	3,366	3,119