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 September 30, 2017 

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	47-2509828
(State or other jurisdiction of incorporation or organization)	(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 November 3, 2017, there were approximately 31,382,170 shares of the registrant's Class A common stock and 10,546,534 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 September 30, 2017 and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2017 and 2016	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34
Item 4.	Controls and Procedures	35
	Part II. Other Information
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.	Exhibits	38
	Signatures	S-1

i 

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, 2016, 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.

ii 

Part I. Financial Information

Item 1.  Financial Statements

WORKIVA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	As of September 30, 2017		As of December 31, 2016
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	62,718	$	51,281
Marketable securities	15,033		11,435
Accounts receivable, net of allowance for doubtful accounts of $646 and $900 at September 30, 2017 and December 31, 2016, respectively	24,283		22,535
Deferred commissions	2,208		1,864
Other receivables	1,109		1,545
Prepaid expenses	6,298		9,382
Total current assets	111,649		98,042
Property and equipment, net	41,300		42,590
Intangible assets, net	1,088		1,012
Other assets	1,553		1,499
Total assets	$	155,590	$	143,143

1 

WORKIVA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share and per share amounts)

	As of September 30, 2017		As of December 31, 2016
	(unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable	$	1,861	$	849
Accrued expenses and other current liabilities	20,771		20,695
Deferred revenue	99,149		76,016
Deferred government grant obligation	813		1,022
Current portion of capital lease and financing obligations	1,184		1,285
Current portion of long-term debt	—		20
Total current liabilities	123,778		99,887
Deferred revenue	23,278		21,485
Deferred government grant obligation	289		1,000
Other long-term liabilities	4,008		4,100
Capital lease and financing obligations	18,709		19,743
Long-term debt	—		53
Total liabilities	170,062		146,268
Stockholders’ deficit
Class A common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 31,358,479 and 30,369,199 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	31		30
Class B common stock, $0.001 par value per share, 500,000,000 shares authorized, 10,546,534 and 10,891,888 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	11		11
Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding	—		—
Additional paid-in-capital	236,386		217,454
Accumulated deficit	(251,016)		(220,911)
Accumulated other comprehensive income	116		291
Total stockholders’ deficit	(14,472)		(3,125)
Total liabilities and stockholders’ deficit	$	155,590	$	143,143

See accompanying notes.

2 

WORKIVA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Revenue
Subscription and support	$	43,214	$	36,237	$	123,734	$	104,791
Professional services	8,854		8,473		29,629		27,481
Total revenue	52,068		44,710		153,363		132,272
Cost of revenue
Subscription and support	8,472		6,694		23,867		20,651
Professional services	7,180		6,040		20,289		17,766
Total cost of revenue	15,652		12,734		44,156		38,417
Gross profit	36,416		31,976		109,207		93,855
Operating expenses
Research and development	17,527		14,342		49,302		42,905
Sales and marketing	23,712		22,354		62,212		62,270
General and administrative	8,959		8,015		27,323		24,850
Total operating expenses	50,198		44,711		138,837		130,025
Loss from operations	(13,782)		(12,735)		(29,630)		(36,170)
Interest expense	(464)		(462)		(1,394)		(1,420)
Other income, net	198		298		986		1,152
Loss before provision (benefit) for income taxes	(14,048)		(12,899)		(30,038)		(36,438)
Provision (benefit) for income taxes	25		(8)		67		23
Net loss	$	(14,073)	$	(12,891)	$	(30,105)	$	(36,461)
Net loss per common share:
Basic and diluted	$	(0.34)	$	(0.32)	$	(0.73)	$	(0.90)
Weighted-average common shares outstanding - basic and diluted	41,815,139		40,762,960		41,453,736		40,603,430

See accompanying notes.  

3 

WORKIVA INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Net loss	$	(14,073)	$	(12,891)	$	(30,105)	$	(36,461)
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment, net of income tax benefit of $0 for both of the three months ended September 30, 2017 and 2016, and net of income tax benefit of $2 and $21 for the nine months ended September 30, 2017 and 2016, respectively	(82)		(4)		(168)		(37)
Unrealized (loss) gain on available-for-sale securities, net of income tax benefit of $0 and $5 for the three months ended September 30, 2017 and 2016, respectively, and net of income tax (expense) of ($2) and ($28) for the nine months ended September 30, 2017 and 2016, respectively	(7)		(8)		(7)		46
Other comprehensive (loss) income, net of tax	(89)		(12)		(175)		9
Comprehensive loss	$	(14,162)	$	(12,903)	$	(30,280)	$	(36,452)

See accompanying notes.  

4 

WORKIVA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Cash flows from operating activities
Net loss	$	(14,073)	$	(12,891)	$	(30,105)	$	(36,461)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization	854		944		2,612		2,916
Stock-based compensation expense	4,664		3,670		13,200		10,562
(Recovery of) provision for doubtful accounts	(691)		(92)		(259)		78
Realized gain on sale of available-for-sale securities, net	—		—		—		(6)
Amortization of premiums and discounts on marketable securities, net	24		36		83		111
Recognition of deferred government grant obligation	(207)		(247)		(943)		(910)
Deferred income tax	—		5		—		(7)
Changes in assets and liabilities:
Accounts receivable	(757)		(4,009)		(1,299)		(6,734)
Deferred commissions	(179)		(135)		(330)		(264)
Other receivables	468		(365)		443		(447)
Prepaid expenses and other	5,123		415		3,097		(1,098)
Other assets	(87)		(455)		(74)		(841)
Accounts payable	669		279		1,008		380
Deferred revenue	5,904		13,228		24,398		15,412
Accrued expenses and other liabilities	3,474		2,410		(83)		(3,012)
Net cash provided by (used in) operating activities	5,186		2,793		11,748		(20,321)
Cash flows from investing activities
Purchase of property and equipment	(987)		(91)		(1,134)		(1,100)
Purchase of marketable securities	(5,017)		—		(11,367)		(802)
Maturities of marketable securities	2,830		—		7,681		—
Sale of marketable securities	—		—		—		7,197
Purchase of intangible assets	(55)		(38)		(144)		(152)
Net cash (used in) provided by investing activities	(3,229)		(129)		(4,964)		5,143

5 

WORKIVA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Cash flows from financing activities
Proceeds from option exercises	1,154		840		6,669		1,360
Taxes paid related to net share settlements of stock-based compensation awards	—		—		(936)		(761)
Repayment of other long-term debt	(53)		—		(73)		(18)
Principal payments on capital lease and financing obligations	(348)		(538)		(1,135)		(1,446)
Proceeds from government grants	—		—		22		183
Deferred financing costs	(71)		—		(81)		(33)
Net cash provided by (used in) financing activities	682		302		4,466		(715)
Effect of foreign exchange rates on cash	93		(9)		187		(15)
Net increase (decrease) in cash and cash equivalents	2,732		2,957		11,437		(15,908)
Cash and cash equivalents at beginning of period	59,986		39,885		51,281		58,750
Cash and cash equivalents at end of period	$	62,718	$	42,842	$	62,718	$	42,842
Supplemental cash flow disclosure
Cash paid for interest	$	447	$	600	$	1,194	$	1,392
Cash paid for income taxes, net of refunds	$	2	$	(26)	$	42	$	22
Supplemental disclosure of noncash investing and financing activities
Allowance for tenant improvements	$	—	$	80	$	—	$	481
Purchases of property and equipment, accrued but not paid	$	—	$	505	$	—	$	505

See accompanying notes.  

6 

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 created Wdesk, a collaborative work management platform for organizations to collect, link, report and analyze their business data. Wdesk’s proprietary word processing, spreadsheet and presentation applications are integrated and built upon a data management engine, offering synchronized data, controlled collaboration, 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 operations. Our operational headquarters are located in Ames, Iowa, with additional offices located in the United States, Europe, and Canada.

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, 2016 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 nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full year ending December 31, 2017. Seasonality has affected our revenue, expenses and cash flow in the first and third quarters. 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. Payment of cash bonuses in the first quarter affects 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, 2016 filed with the SEC on February 23, 2017.

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 U.S. GAAP 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 determination of the relative selling prices of our services, health insurance claims incurred but not yet reported,

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collectability of accounts receivable, valuation of available-for-sale marketable securities, useful lives of 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. 

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Under this ASU, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as required by current guidance, or to recognize forfeitures as they occur in addition to other changes. The guidance became effective for interim and annual periods beginning after December 15, 2016. Effective January 1, 2017, we adopted this standard. We elected to recognize forfeitures on share-based payment awards as they occur. The adoption, along with the remaining provisions of ASU 2016-09, did not have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual reporting period. The new standard must be adopted using a modified retrospective transition method, with the cumulative effect recognized as of the date of initial adoption. Effective January 1, 2017, 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 May 2014, the Financial Accounting Standards Board (FASB) issued guidance codified in ASC 606, Revenue Recognition - Revenue from Contracts with Customers (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. The FASB has issued several amendments and updates to the new revenue standard, including guidance related to when an entity should recognize revenue gross as a principal or net as an agent and how an entity should identify performance obligations. As amended, ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for all entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

We believe the adoption of ASU 2014-09 will require us to recognize revenue from certain of our professional services over time rather than upon completion of the services. We expect this change may result in some acceleration of revenue recognition.

We have determined that an agreement to purchase our professional services constitutes an option to purchase services in accordance with ASC 606-10-55-41 rather than an agreement that creates enforceable rights and obligations because of the customer’s contractual right to cancel the unused services. Based on our review, certain of our professional service agreements do not contain a material right and are only accounted for in accordance with ASU 2014-09 when the customer exercises its option to purchase additional goods or services. In the case of agreements where we have determined that the

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option provides the customer with a material right, we will be required to allocate a portion of the transaction price to the material right. The treatment of customer options under ASU 2014-09 may result in a different allocation of the transaction price than under current guidance.  

In addition, under current guidance, the amount that is allocated to, and recognized as revenue related to, a delivered service is limited to the amount that is not contingent on completion of the remaining performance obligations. We expect the removal of this limitation on contingent revenue under ASU 2014-09 to result in revenue being recognized earlier for certain contracts.

In addition, ASU 2014-09 requires that all incremental costs of obtaining a contract with a customer be recognized as an asset. We expect this requirement will result in an increase in the costs that we capitalize. The guidance also requires that these costs be deferred over a term that is consistent with the transfer of services related to the asset. Based on our preliminary analysis, we believe this term will be approximately three years compared to one year or less under current guidance.

Under ASU 2014-09, in addition to recording deferred revenue when the related cash payments are received for noncancellable services, we will record deferred revenue when payments are due in advance of our performance of those services. We expect this change will result in an offsetting increase in accounts receivable and deferred revenue.

We are still evaluating the ASU for other potential impacts to our consolidated financial statements. We plan to adopt the guidance as of January 1, 2018 and expect to utilize the modified retrospective transition method. We plan to apply this transition method only to contracts that are not completed as of January 1, 2018. We have a project plan in place guiding our transition that includes the necessary changes to accounting processes, procedures, systems and internal controls.

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 prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The implementation of this standard is not expected to have a significant impact on our consolidated financial statements.

9 

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):

	September 30, 2017		December 31, 2016
Accrued vacation	$	5,826	$	4,368
Accrued commissions	2,429		2,382
Accrued bonuses	7,642		8,927
Estimated health insurance claims	1,100		1,210
Accrued other liabilities	3,774		3,808
	$	20,771	$	20,695

Other Income, net

Other income, net for the three and nine months ended September 30, 2017 and 2016 consisted of (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Interest income	$	168	$	64	$	388	$	209
Income from training reimbursement program	207		247		943		910
Other	(177)		(13)		(345)		33
	$	198	$	298	$	986	$	1,152

3. Marketable Securities

At September 30, 2017, marketable securities consisted of the following (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Fair Value
U.S. treasury debt securities	$	2,888	$	—	$	(3)	$	2,885
U.S. corporate debt securities	12,161		1		(14)		12,148
Money market funds	52,027		—		—		52,027
	$	67,076	$	1	$	(17)	$	67,060
Included in cash and cash equivalents	$	52,027	$	—	$	—	$	52,027
Included in marketable securities	$	15,049	$	1	$	(17)	$	15,033

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At December 31, 2016, marketable securities consisted of the following (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Fair Value
U.S. treasury debt securities	$	3,503	$	—	$	(5)	$	3,498
U.S. corporate debt securities	7,943		1		(7)		7,937
Money market funds	43,496		—		—		43,496
	$	54,942	$	1	$	(12)	$	54,931
Included in cash and cash equivalents	$	43,496	$	—	$	—	$	43,496
Included in marketable securities	$	11,446	$	1	$	(12)	$	11,435

The following table presents gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of September 30, 2017, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

	As of September 30, 2017
	Less than 12 months				12 months or greater
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. treasury debt securities	$	2,885	$	(3)	$	—	$	—
U.S. corporate debt securities	9,884		(14)		—		—
Total	$	12,769	$	(17)	$	—	$	—

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 September 30, 2017 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,

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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 September 30, 2017, 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 September 30, 2017						Fair Value Measurements as of December 31, 2016
Description	Total		Level 1		Level 2		Total		Level 1		Level 2
Money market funds	$	52,027	$	52,027	$	—	$	43,496	$	43,496	$	—
U.S. treasury debt securities	2,885		—		2,885		3,498		—		3,498
U.S. corporate debt securities	12,148		—		12,148		7,937		—		7,937
	$	67,060	$	52,027	$	15,033	$	54,931	$	43,496	$	11,435
Included in cash and cash equivalents	$	52,027					$	43,496
Included in marketable securities	$	15,033					$	11,435

5. Commitments and Contingencies

Lease Commitments

There have been no material changes in our future estimated minimum lease payments under non-cancelable operating, capital and financing leases, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

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. Although the results of litigation and claims cannot be predicted

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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.

6. 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 ESPP purchase rights.

As of September 30, 2017, awards outstanding under the 2009 Plan consisted of stock options, and awards outstanding under the 2014 Plan consisted of stock options, restricted stock awards and restricted stock units.

As of September 30, 2017, 2,271,466 shares of Class A common stock were available for grant under the 2014 Plan.

Our Employee Stock Purchase Plan (“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 September 30, 2017, 5,000,000 shares of 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. The ESPP's initial offering period began in July 2017. Accordingly, no shares of common stock had been purchased or distributed pursuant to the ESPP as of September 30, 2017.

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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 September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Cost of revenue
Subscription and support	$	204	$	122	$	522	$	365
Professional services	129		100		329		315
Operating expenses
Research and development	601		594		1,566		1,787
Sales and marketing	788		567		2,141		1,471
General and administrative	2,942		2,287		8,642		6,624
Total	$	4,664	$	3,670	$	13,200	$	10,562

The fair value of each option grant and each share issued under the ESPP is estimated on the date of grant using the Black-Scholes option-pricing model. For stock options, expected volatility is based on the historical volatility of our common stock and historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the options. For the ESPP purchase rights, expected volatility is based on the historical volatility of our common stock. The expected term represents the period of time the options and the ESPP purchase rights are expected to be outstanding. For stock options, the expected term is based on the “simplified method” as defined by SEC Staff Accounting Bulletin No. 110 (Topic 14.D.2). We use the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the options. 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 options and ESPP purchase rights. 

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

	Three months ended September 30,		Nine months ended September 30,
	2017	2016	2017	2016
Stock Options
Expected term (in years)	6.1	6.1	6.0 - 6.1	6.0 - 6.1
Risk-free interest rate	1.9% - 2.1%	1.2% - 1.3%	1.9% - 2.1%	1.2% - 1.9%
Expected volatility	38.9% - 39.1%	44.4% - 44.6%	38.9% - 43.8%	44.4% - 45.3%
ESPP
Expected term (in years)	0.5	—	0.5	—
Risk-free interest rate	1.2%	—%	1.2%	—	%
Expected volatility	28.5%	—%	28.5%	—	%

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Stock Options

The following table summarizes the option activity under the Plans for the nine months ended September 30, 2017:

	Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
					(in thousands)
Outstanding at December 31, 2016	7,532,455	$	12.22	7.2	$	19,988
Granted	1,772,353	14.99
Forfeited	(279,651)	14.55
Exercised	(688,661)	9.68
Outstanding at September 30, 2017	8,336,496	$	12.95	7.1	$	65,845
Exercisable at September 30, 2017	4,727,976	$	11.31	5.9	$	45,104

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 nine months ended September 30, 2017 and 2016 was $5.5 million and $3.4 million, respectively.

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2017 and 2016 was $6.41 and $6.78, respectively. The total fair value of options vested during the nine months ended September 30, 2017 and 2016 was approximately $7.7 million and $6.9 million, respectively. Total unrecognized compensation expense of $20.5 million related to options will be recognized over a weighted-average period of 2.5 years.

Restricted Stock Awards

We have granted restricted stock awards to our executive officers that vest in three equal annual installments from the date of grant. The recipient of an award of restricted stock under the Plan may vote and receive dividends on the shares of restricted stock covered by the award. The fair value for restricted stock awards is calculated based on the stock price on the date of grant. The total fair value of restricted stock awards vested during the nine months ended September 30, 2017 and 2016 was approximately $2.4 million and $3.3 million, respectively.

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The following table summarizes the restricted stock award activity under the Plan for the nine months ended September 30, 2017:

	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2016	353,335	$	13.40
Granted	—	—
Forfeited	—	—
Vested	(176,670)	13.40
Unvested at September 30, 2017	176,665	$	13.40

Compensation expense associated with unvested restricted stock awards is recognized on a straight-line basis over the vesting period. At September 30, 2017, there was approximately $0.8 million of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 0.4 years.

Restricted Stock Units

We have granted restricted stock units to our executive officers that vest in three equal annual installments from the date of grant and to non-employee members of our Board of Directors with 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 nine months ended September 30, 2017 was approximately $2.5 million. No restricted stock units vested during the nine months ended September 30, 2016.

The following table summarizes the restricted stock unit activity under the Plan for the nine months ended September 30, 2017:

	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2016	381,952	$	15.11
Granted	413,792	13.95
Forfeited	—	—
Vested(1)	(174,211)	14.58
Unvested at September 30, 2017	621,533