•actual or anticipated fluctuations in our financial condition and operating results;
•changes in projected operational and financial results;
•addition or loss of significant customers;
•changes in laws or regulations applicable to our solutions;
•actual or anticipated changes in our growth rate relative to our competitors;
•announcements of technological innovations or new offerings by us or our competitors;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
•additions or departures of key personnel;
•changes in our financial guidance or securities analysts’ estimates of our financial performance;
•discussion of us or our stock price by the financial press and in online investor communities;
•changes in accounting principles;
•announcements related to litigation;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•sales of our Class A or Class B common stock by us or our stockholders;
•share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and
•general economic and market conditions.
Furthermore, the stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, and technology companies in particular. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
If there are substantial sales of shares of our Class A common stock, the price of our Class A common stock could decline.
The price of our Class A common stock could decline if there are substantial sales of our Class A common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our Class A common stock available for sale. All of the shares of Class A common stock sold in our initial public offering are freely tradeable without restrictions or further registration under the Securities Act of 1933, as amended (Securities Act), except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Shares held by directors, executive officers and other affiliates are subject to volume limitations under Rule 144 under the Securities Act. In addition, the shares of Class A common stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans are eligible for sale to the public, subject to certain legal and contractual limitations. The market price of the shares of our Class A common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.
The dual class structure of our common stock has the effect of concentrating voting control with our executives and their affiliates.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of December 31, 2017,2018, the holders of shares of our Class B common stock collectively beneficially owned shares representing approximately 76%73% of the voting power of our outstanding capital stock. Our executive officers collectively beneficially owned shares representing a substantial majority of the voting power of our outstanding capital stock as of that date. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit the ability of Class A common stockholders to influence corporate matters for the foreseeable future and may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders. The holders of Class B common stock may also have interests that differ from those of Class A common stock holders and may vote in a way that may be adverse to the interests of holders of Class A common stock.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers to family members and transfers effected for estate planning purposes. The conversion of Class B common stock to
Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, certain holders
of Class B common stock retain a significant portion of their holdings of Class B common stock for an extended period of time, and a significant portion of the Class B common stock initially held by other executives is converted to Class A common stock, the remaining holders of Class B common stock could, as a result, acquire control of a majority of the combined voting power. As directors and executive officers, the initial beneficial owners of Class B common stock owe a fiduciary duty to our stockholders and must act in good faith in a manner they reasonably believe to be in the best interests of our stockholders. As stockholders, even if one of them becomes a controlling stockholder, each beneficial owner of Class B common stock is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and may negatively affect the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:
•establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;
•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, the chairman of our board of directors or our chief executive officer or president (in the absence of a chief executive officer);
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•authorize our board of directors to issue, without further action by the stockholders, up to 100,000,000 shares of undesignated preferred stock;
•require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation; and
•reflect two classes of common stock, as discussed above.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are a Delaware corporation and governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder, in particular those owning 15% or
more of our outstanding voting stock, for a period of three years following the date on which the stockholder became an “interested” stockholder.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
Our certificate of incorporation authorizes us to issue up to 1,000,000,000 shares of Class A common stock. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell Class A common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A common stock.
We will continue to incur significantly increasedsignificant costs and devote substantial management time as a result of operating as a public company.
As a public company, we incur significant legal, accounting and other expenses that we didwould not incur as a private company. For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC and the New York Stock Exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has increased our legal and financial compliance costs and made some activities more time consuming and costly. Many of these costs recur annually. We have incurred, and will continue to incur, significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business could be adversely affected.
As a result of disclosure of information as a public company, our business and financial condition have becomeare more visible than for a private company, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If the claims are successful, our business operations and financial results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business operations and financial results. These factors could also make it more difficult for us to attract and retain qualified employees, executive officers and members of our board of directors.
Operating as a public company makes it more difficult and more expensive for us to obtain director and officer liability insurance on the terms that we would like. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.
A failure to maintain adequate internal controls over our financial and management systems could cause errors in our financial reporting, which could cause a loss of investor confidence and result in a decline in the price of our Class A common stock.
In order to meet our reporting obligations as a public company, we must maintain effective financial and management systems and internal controls. Moreover, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. If we have a material weakness or deficiency in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. Effective internal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to maintain effective financial and management systems and internal controls could result in errors in our financial reporting, us being subject to regulatory action and a loss of investor confidence in the reliability of our financial statements, any of which in turn could cause the market value of our Class A common stock to decline and adversely affect our ability to raise capital.
We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we are taking advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will cease to be an “emerging growth company” upon the earliest of (i) December 31, 2019, (ii) the last day of the first fiscal year in which our annual gross revenue is $1 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in nonconvertible debt securities or (iv) the date on which we qualify as a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates. We cannot determine whether investors find our Class A common stock less attractive or our company less comparable to certain other public companies because we rely on these exemptions.
We do not intend to pay dividends for the foreseeable future.
We may not declare or pay cash dividends on our capital stock in the near future. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their Class A common stock after price appreciation as the only way to realize any future gains on their investment.
If securities or industry analysts do not regularly publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations regarding our stock, adversely, or if our actual results differ significantly from our guidance, our stock price and trading volume could decline.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts maintain coverage of us, or if industry analysts cease coverage of us, the trading price for our Class A common stock wouldcould be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our Class A common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.
In addition, from time to time, we may release earnings guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise regarding our future performance that represent our management’s estimates as of the date of release. Some or all of the assumptions of any future guidance that we furnish may not materialize or may vary significantly from actual future results. Any failure to meet guidance or analysts’ expectations could have a material adverse effect on the trading price or trading volume of our Class A common stock and may result in shareholder litigation.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located in Ames, Iowa, where we lease approximately 120,000 square feet of office space. We also lease office facilities in eleven U.S. cities located in Arizona, Colorado, Florida, Georgia, Illinois, Montana, New York, Pennsylvania, South Carolina, and Texas. Internationally, we lease offices in Ontario and Saskatchewan, Canada, the Netherlands, and the United Kingdom.Kingdom, Hong Kong and Singapore. We believe that our properties are generally suitable to meet our needs for the foreseeable future. In addition, to the extent we require additional space in the future, we believe that it would be readily available on commercially reasonable terms.
Item 3. Legal Proceedings
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 are not presently a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would have a material adverse effect on our business, financial condition, operating results 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.
Item 4. Mine Safety Disclosure
Not applicable.
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Class A common stock is listed on the NYSE under the symbol “WK”. The following table sets forth the range of high and low per share sales prices for our common stock as reported on the NYSE for the periods indicated.
| | | | | | | | | | | | | | |
| | Prices |
| | High | | Low |
Year ending December 31, 2017 | | | | |
Fourth quarter | | $ | 23.70 | | $ | 20.60 |
Third quarter | | $ | 21.05 | | $ | 18.35 |
Second quarter | | $ | 20.15 | | $ | 15.40 |
First quarter | | $ | 16.20 | | $ | 12.15 |
Year ending December 31, 2016 | | | | |
Fourth quarter | | $ | 18.11 | | $ | 12.65 |
Third quarter | | $ | 19.04 | | $ | 13.19 |
Second quarter | | $ | 14.05 | | $ | 11.14 |
First quarter | | $ | 17.48 | | $ | 10.92 |
Our Class B common stock is not listed or traded on any stock exchange.
Stockholders
As of December 31, 2017,2018, there were approximately 175131 stockholders of record of our Class A common stock as well as 13 stockholders of record of our Class B common stock.
Dividends
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends on our capital stock. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant. In addition, our credit facility with Silicon Valley Bank restricts our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a summary of the material terms of our credit facility.
Stock Performance Graph
The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended.
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the Standard & Poor’s 500 Index and the Nasdaq Computer Index. The chart assumes $100 was invested at the close of market on December 12, 2014, in the Class A common stock of Workiva Inc., the S&P 500 Index and the Nasdaq Computer Index, and assumes the reinvestment of any dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock.
Use of Proceeds from Public Offerings of Common Stock
On December 17, 2014, we closed our initial public offering of 7,200,000 shares of Class A common stock at a price to the public of $14.00 per share. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-199459), which was declared effective by the SEC on December 11, 2014.
There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on December 12, 2014. Pending the uses described in our prospectus, we have invested the net proceeds in money market funds and marketable securities. We have also repaid a $2.0 million forgivable loan with proceeds from our initial public offering, allowing us to cancel letters of credit in the amount that served as security for the forgivable loan.
Issuer Purchases of Equity Securities
Not applicable.
Issuer Purchases of Equity Securities
The following table provides information about purchases of shares of our Class A common stock during the three months ended December 31, 2017 related to shares withheld upon vesting of restricted stock awards for tax withholding obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Date | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program |
October 2017 | | — | | — | | — | | — |
November 2017 | | 8,445 | | $ | 22.35 | | — | | — |
December 2017 | | — | | — | | — | | — |
Total | | 8,445 | | $ | 22.35 | | — | | — |
(1) Total number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of stock-based compensation awards.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the years ended December 31, 2018, 2017 2016 and 20152016 and the selected consolidated balance sheet data as of December 31, 20172018 and 20162017 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The following selected consolidated financial data for the years ended December 31, 20142015 and 2013,2014, and the selected consolidated balance sheet data as of December 31, 2016, 2015 2014 and 20132014 are derived from our audited consolidated financial statements not included in this Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future.
Consolidated Statement of Operations Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | |
| (in thousands, except share and per share information) |
Revenue | | | | | | | | | |
Subscription and support | $ | 169,283 | | $ | 143,120 | | $ | 116,288 | | $ | 91,317 | | $ | 65,164 |
Professional services | 38,586 | | 35,526 | | 28,984 | | 21,377 | | 19,987 |
Total revenue | 207,869 | | 178,646 | | 145,272 | | 112,694 | | 85,151 |
Cost of revenue | | | | | | | | | |
Subscription and support(1) | 32,646 | | 27,895 | | 22,559 | | 21,182 | | 15,129 |
Professional services(1) | 27,599 | | 23,730 | | 17,645 | | 12,696 | | 9,520 |
Total cost of revenue | 60,245 | | 51,625 | | 40,204 | | 33,878 | | 24,649 |
Gross profit | 147,624 | | 127,021 | | 105,068 | | 78,816 | | 60,502 |
Operating expenses | | | | | | | | | |
Research and development(1) | 68,172 | | 57,438 | | 50,466 | | 44,145 | | 34,116 |
Sales and marketing(1) | 84,161 | | 80,466 | | 69,569 | | 53,498 | | 41,067 |
General and administrative(1) | 39,594 | | 32,695 | | 28,716 | | 19,783 | | 14,601 |
Total operating expenses | 191,927 | | 170,599 | | 148,751 | | 117,426 | | 89,784 |
Loss from operations | (44,303) | | (43,578) | | (43,683) | | (38,610) | | (29,282) |
Interest expense | (1,845) | | (1,875) | | (2,025) | | (2,044) | | (366) |
Other income and (expense), net(2) | 1,783 | | 1,500 | | 2,302 | | (468) | | 104 |
Loss before provision for income taxes | (44,365) | | (43,953) | | (43,406) | | (41,122) | | (29,544) |
Provision (benefit) for income taxes | 61 | | 24 | | (7) | | 32 | | — |
Net loss | $ | (44,426) | | $ | (43,977) | | $ | (43,399) | | $ | (41,154) | | $ | (29,544) |
Net loss per common share: | | | | | | | | | |
Basic and diluted | $ | (1.07) | | $ | (1.08) | | $ | (1.09) | | $ | (1.28) | | $ | (0.94) |
Weighted-average common shares outstanding - basic and diluted | 41,618,838 | | 40,671,133 | | 39,852,624 | | 32,156,060 | | 31,376,603 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | | | |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (in thousands, except share and per share information) | | | | | | | | |
Revenue | | | | | | | | | |
Subscription and support | $ | 200,392 | | $ | 169,283 | | $ | 143,120 | | $ | 116,288 | | $ | 91,317 |
Professional services | 43,952 | | 38,586 | | 35,526 | | 28,984 | | 21,377 |
Total revenue | 244,344 | | 207,869 | | 178,646 | | 145,272 | | 112,694 |
Cost of revenue | | | | | | | | | |
Subscription and support(1) | 34,215 | | 32,646 | | 27,895 | | 22,559 | | 21,182 |
Professional services(1) | 31,645 | | 27,599 | | 23,730 | | 17,645 | | 12,696 |
Total cost of revenue | 65,860 | | 60,245 | | 51,625 | | 40,204 | | 33,878 |
Gross profit | 178,484 | | 147,624 | | 127,021 | | 105,068 | | 78,816 |
Operating expenses | | | | | | | | | |
Research and development(1) | 81,602 | | 68,172 | | 57,438 | | 50,466 | | 44,145 |
Sales and marketing(1) | 90,337 | | 84,161 | | 80,466 | | 69,569 | | 53,498 |
General and administrative(1)(2) | 56,333 | | 39,594 | | 32,695 | | 28,716 | | 19,783 |
Total operating expenses | 228,272 | | 191,927 | | 170,599 | | 148,751 | | 117,426 |
Loss from operations | (49,788) | | (44,303) | | (43,578) | | (43,683) | | (38,610) |
Interest expense | (1,827) | | (1,845) | | (1,875) | | (2,025) | | (2,044) |
Other income and (expense), net(3) | 1,791 | | 1,783 | | 1,500 | | 2,302 | | (468) |
Loss before provision for income taxes | (49,824) | | (44,365) | | (43,953) | | (43,406) | | (41,122) |
Provision (benefit) for income taxes | 247 | | 61 | | 24 | | (7) | | 32 |
Net loss | $ | (50,071) | | $ | (44,426) | | $ | (43,977) | | $ | (43,399) | | $ | (41,154) |
Net loss per common share: | | | | | | | | | |
Basic and diluted | (1.15) | | (1.07) | | (1.08) | | (1.09) | | (1.28) |
Weighted-average common shares outstanding - basic and diluted | 43,640,408 | | 41,618,838 | | 40,671,133 | | 39,852,624 | | 32,156,060 |
(1) Stock-based compensation expense included in these line items is as follows:
| | | Year ended December 31, | | Year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands) | | (in thousands) | |
Cost of revenue | Cost of revenue | | Cost of revenue | |
Subscription and support | Subscription and support | $ | 738 | | $ | 493 | | $ | 363 | | $ | 502 | | $ | 200 | Subscription and support | $ | 700 | | $ | 738 | | $ | 493 | | $ | 363 | | $ | 502 |
Professional services | Professional services | 465 | | 411 | | 349 | | 337 | | 171 | Professional services | 619 | | 465 | | 411 | | 349 | | 337 |
Operating expenses | Operating expenses | | Operating expenses | |
Research and development | Research and development | 2,224 | | 2,365 | | 1,924 | | 1,757 | | 762 | Research and development | 5,842 | | 2,224 | | 2,365 | | 1,924 | | 1,757 |
Sales and marketing | Sales and marketing | 2,983 | | 2,075 | | 1,727 | | 1,241 | | 799 | Sales and marketing | 5,416 | | 2,983 | | 2,075 | | 1,727 | | 1,241 |
General and administrative | General and administrative | 13,066 | | 8,903 | | 6,637 | | 3,548 | | 1,438 | General and administrative | 18,264 | | 13,066 | | 8,903 | | 6,637 | | 3,548 |
Total stock-based compensation expense | Total stock-based compensation expense | $ | 19,476 | | $ | 14,247 | | $ | 11,000 | | $ | 7,385 | | $ | 3,370 | Total stock-based compensation expense | $ | 30,841 | | $ | 19,476 | | $ | 14,247 | | $ | 11,000 | | $ | 7,385 |
(2) During the second quarter of 2018, we recorded an additional $5.9 million and $3.6 million of cash-based and equity-based compensation, respectively, to general and administrative expense pursuant to a separation agreement with our former CEO.
(2)(3) During December 2015, we resolved all contingencies associated with a government grant agreement resulting in higher government grant income recorded to “Other income and (expense), net” for the year ended December 31, 2015. See Note 5, Commitments and Contingencies, to the Consolidated Financial Statements.
Consolidated Balance Sheet Data
| | | December 31, | | As of December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands) | | (in thousands) | |
Cash and cash equivalents | Cash and cash equivalents | $ | 60,333 | | $ | 51,281 | | $ | 58,750 | | $ | 101,131 | | $ | 15,515 | Cash and cash equivalents | $ | 77,584 | | $ | 60,333 | | $ | 51,281 | | $ | 58,750 | | $ | 101,131 |
Working capital, excluding deferred revenue and deferred government grant obligation | 90,852 | | 75,193 | | 70,520 | | 94,740 | | 19,926 | |
Working capital, excluding deferred revenue | | Working capital, excluding deferred revenue | 134,195 | | 90,635 | | 74,171 | | 69,535 | | 92,416 |
Total assets | Total assets | 157,715 | | 143,143 | | 143,895 | | 164,551 | | 73,944 | Total assets | 231,111 | | 157,715 | | 143,143 | | 143,895 | | 164,551 |
Deferred revenue, current and long term | Deferred revenue, current and long term | 127,393 | | 97,501 | | 63,338 | | 56,276 | | 36,385 | Deferred revenue, current and long term | 173,716 | | 127,393 | | 97,501 | | 63,338 | | 56,276 |
Total current liabilities | Total current liabilities | 129,341 | | 99,887 | | 84,084 | | 66,730 | | 43,425 | Total current liabilities | 191,581 | | 129,341 | | 99,887 | | 84,084 | | 66,730 |
Total non-current liabilities | Total non-current liabilities | 45,308 | | 46,381 | | 34,092 | | 42,002 | | 37,306 | Total non-current liabilities | 49,270 | | 45,308 | | 46,381 | | 34,092 | | 42,002 |
Total stockholders’ (deficit) equity | Total stockholders’ (deficit) equity | (16,934) | | (3,125) | | 25,719 | | 55,819 | | — | Total stockholders’ (deficit) equity | (9,740) | | (16,934) | | (3,125) | | 25,719 | | 55,819 |
Total members’ (deficit) | — | | — | | — | | — | | (6,787) | |
Item 7. 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 consolidated financial statements and related notes included elsewhere in this Annual Report. 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 “Section 1A. Risk Factors” included elsewhere in this Annual Report.
Overview
Workiva providesis a leading provider of cloud-based solutions for connected data, reporting and compliance. Our platform, Wdesk, an intuitive cloud platform that modernizes how customers work with business data atis used by thousands of organizations.public and private companies, government agencies and higher-education institutions. Wdesk is built on a data management engine, offeringoffers controlled collaboration, data connections,linking, data integrations, granular permissions, process management and a full audit trail. Wdesk helps mitigate risk,users are able to combine narrative with their data, which greatly improves productivity and gives users confidenceinsight in their data-driven decisions.financial, regulatory and management reporting processes. As of December 31, 2017, we provided our solutions to more than 3,000 enterprise customers,2018, 3,340 organizations, including more than 70%75% of Fortune 500 companies.® companies, subscribed to our Wdesk platform.(1)
Our scalable, enterprise-grade data engine enables users to collect, aggregate and manage their unstructured and structuredcustomers can connect Wdesk with data in Wdesk. Althoughmore than 100 cloud and on-premise applications. In June 2018, we expanded our Wdesk platform is usedwith 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, across public and private companies, state and local governments and universities, we are currently focusingfocus our sales and marketing resources to expand the use of Wdesk in fourfive areas: finance and accounting, audit and internal controls,accounting; risk and compliancecontrols; regulatory reporting; financial close, management and performance reporting; and managementstatutory and corporate tax reporting.
We operate our business on a software-as-a-serviceSoftware-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. OurPrior to the third quarter of 2018, our subscription pricing iswas based primarily on the number of corporate entities, number of users, level of customer support and length of contract. Our pricingThereafter, we began converting existing customer orders to, and signing new orders primarily based on, a solution-based licensing model. Under this new model, is scaledoperating metrics related to a customer's expected use of each solution determine the numberprice. We expect a substantial majority of users, so theour subscription price per user typically decreases as the number of users increases.revenue will be priced on solution-based licensing by mid-2020. We charge customers additional fees primarily for document setup and XBRL tagging services.
(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.
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-salesdirect sales channel with partnerships. Our advisory and service partners offer a widerwider 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 96.0%96.1% (excluding add-on seats) for the twelve months ended December 31, 2017.2018.
Our full-time headcount was relatively flat in 2018 with 1,319 employees at December 31, 2018 compared to 1,318 at December 31, 2017. We expect to continue to invest in the development of our solutions, infrastructure and sales and marketing to drive long-term growth. Our full-time employeeAs a result, we expect increased growth in our headcount expanded to 1,318 at December 31, 2017 from 1,172 at December 31, 2016, an increase of 12.5%.in 2019.
We have achieved significant revenue growth in recent periods. Our revenue grew to $244.3 million in 2018 from $207.9 million in 2017, from $178.6 million in 2016, an increase of 16.4%17.5%. We incurred net losses of $50.1 million and $44.4 million in 2018 and $44.0 million in 2017, and 2016, respectively.
(1) Claim not confirmed by FORTUNE or Time Inc. FORTUNE 500 is a registered trademark of Time Inc. and is used under license. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of, Workiva Inc.
We adopted the guidance codified in ASC 606,842, Revenue Recognition - Revenue from Contracts with CustomersLeases (ASU 2014-09)(ASU 2016-02) effective January 1, 2018.2019. We expect the application of this guidance will result in timingrecognition of right-of-use assets and presentation changes affectinglease liabilities on our consolidated balance sheet and statementsheet. Adoption of operations, including acceleration of our professional services revenue for certain contracts; longer deferral of the incremental costs of obtaining a contract; and increasesASC 842 will result in accounts receivable, deferred revenue and accrued expenses and other current liabilities. We will record a one-time adjustment to the opening balance of our accumulated deficit as ofon January 1, 2018 to adjust for these items.2019. We do not expect the adoption of this standard to impact our totalstatement of operations or statement of cash flows from operations.flows. Refer to Note 1 of the notes to the consolidated financial statements for additional details of our evaluation of ASU 2014-09.ASC 842.
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makes widespread changes to the Internal Revenue Code, including, among other items, the reduction in the federal corporate statutory tax rate from 35% to 21% and the introduction of a new international “Global Intangible Low-Taxed Income” (“GILTI”) regime, both effective January 1, 2018. Please refer to Notes 1 and 11 of the notes to consolidated financial statements for additional details of the impact of the TCJA.
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 add-on seats. Expansion within current customers includes adding usersadditional solutions. Furthermore, converting customer contracts to solution-based licensing typically generates a one-time increase in contract value for both existing solutions and new use cases.each solution.
Pursue New Customers.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 now sell to new customers in the areas of finance and accounting,accounting; risk and compliance, audit and internal controlscontrols; regulatory reporting; financial close, management and performance reporting; and managementstatutory 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 propositionproposition; 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.
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. In 2017, we continuedWe continue to add more 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 Wdesk demand for Wdesk to address broader-based, enterprise-wide opportunities.
Investment in growth.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. Investmentsbase and to take advantage of opportunities that we makehave identified in our salesEMEA, statutory reporting, audit management and marketing and research and development organizations will occur in advance of experiencing any benefits from such investments. As a result, we expect our total operating expenses to increase.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. As of December 31, 2017,2018, approximately 78% of our SEC customers report their financials on a calendar-year basis. As our non-SEC offerings continue to grow, we expect our professional services revenue to continue to become less seasonal. 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
| | | Year ended December 31, | | Year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| | (dollars in thousands) | | (dollars in thousands) | |
Financial metrics | Financial metrics | | Financial metrics | |
Total revenue | Total revenue | $ | 207,869 | | $ | 178,646 | | $ | 145,272 | Total revenue | $ | 244,344 | | $ | 207,869 | | $ | 178,646 |
Year-over-year percentage increase in total revenue | Year-over-year percentage increase in total revenue | 16.4 | % | | | 23.0 | % | | | 28.9 | % | Year-over-year percentage increase in total revenue | 17.5 | % | | 16.4 | % | | 23.0 | % |
Subscription and support revenue | Subscription and support revenue | $ | 169,283 | | $ | 143,120 | | $ | 116,288 | Subscription and support revenue | $ | 200,392 | | $ | 169,283 | | $ | 143,120 |
Year-over-year percentage increase in subscription and support revenue | Year-over-year percentage increase in subscription and support revenue | 18.3 | % | | | 23.1 | % | | | 27.3 | % | Year-over-year percentage increase in subscription and support revenue | 18.4 | % | | 18.3 | % | | 23.1 | % |
Subscription and support as a percent of total revenue | Subscription and support as a percent of total revenue | 81.4 | % | | | 80.1 | % | | | 80.0 | % | Subscription and support as a percent of total revenue | 82.0 | % | | 81.4 | % | | 80.1 | % |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 |
Operating metrics | | | | | |
Number of customers | 3,063 | | 2,772 | | 2,524 |
Subscription and support revenue retention rate | 96.0 | % | | | 95.4 | % | | | 95.8 | % |
Subscription and support revenue retention rate including add-ons | 107.6 | % | | | 107.4 | % | | | 112.5 | % |
| | | | | | | | | | | | | | | | | |
| As of December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Operating metrics | | | | | |
Number of customers | 3,340 | | 3,063 | | 2,772 |
Subscription and support revenue retention rate | 96.1 | % | | 96.0 | % | | 95.4 | % |
Subscription and support revenue retention rate including add-ons | 107.1 | % | | 107.6 | % | | 107.4 | % |
Annual contract value $100k+ | 443 | | 324 | | 236 |
Annual contract value $150k+ | 190 | | 146 | | 96 |
Total customers.customers. We believe total number of customers is a key indicator of our financial success and future revenue potential. We define a customer as an entity with an active subscription contract as of the measurement date. Our customer is typically a parent company or, in a few cases, a significant subsidiary that works with us directly. Companies with publicly listed securities account for a substantial majority of our customers.
Subscription and support revenue retention rate.rate. We calculate our subscription and support revenue retention rate by annualizing the subscription and support revenue recorded in the first month of the measurement period for only those customers in place throughout the entire measurement period, thereby excluding any attrition. We divide the result by the annualized subscription and support revenue in the first month of the measurement period for all customers in place at the beginning of the measurement period. The measurement period is based on the trailing twelve months.
Our subscription and support revenue retention rate was 96.0%96.1% at the December 20172018 measurement date, up slightly from 95.4%96.0% as of December 2016.2017. We believe that our success in maintaining a high rate of revenue retention is attributable primarily to our robust technology platform and strong customer service. Customers being acquired or otherwise ceasing to file SEC reports have been the largest contributing factor to our revenue attrition.
Subscription and support revenue retention rate including add-ons.add-ons. Add-on revenue includes the change in both seats and solutions purchased and seat pricing for existing customers. We calculate our subscription and support revenue retention rate including add-ons by annualizing the subscription and support revenue recorded in the last month of the measurement period for only those customers in place throughout the entire measurement period. We divide the result by the annualized subscription and support revenue in the first month of the measurement period for all customers in place at the beginning of the measurement period. The measurement period is based on the trailing twelve months.
Our subscription and support revenue retention rate including add-ons was 107.6%107.1% at the December 20172018 measurement date, updown slightly from 107.4%107.6% as of December 2016.2017.
Revenue retention rates are calculated using ASC 605 revenue in the last month of the measurement period. See Note 1 to our consolidated financial statements for additional information. In the first quarter of 2019, we plan to begin using quarterly ASC 606 revenue to calculate this metric. We expect quarterly measurements will be less variable than the single month measurements we currently report.
Annual contract value. Our annual contract value (“ACV”) for each customer is calculated by annualizing the subscription and support revenue recognized during each quarter. We believe the increase in the number of larger contracts shows our progress in expanding our customers' adoption of Wdesk.
Components of Results of Operations
Revenue
We generate revenue through the sale of subscriptions to our cloud-based software and the delivery of professional services. We serve a wide range of customers in many industries, and our revenue is not concentrated with any single customer or small group of customers. For each of the years ended December 31, 2018, 2017 2016 and 2015,2016, no single customer represented more than 1% of our revenue, and our largest ten10 customers accounted for less than 5% of our revenue in the aggregate.
We generate sales directly through our sales force and partners. We also identify some sales opportunities with existing customers through our customer success and professional services teams.
Our customer contracts typically range in length from three to 36 months. Our arrangements do not contain general rights of return. We typically invoice our customers for subscription fees in advance, on a quarterly, annual, two-year or three-year basis, with payment due at the start of the subscription term. We planFrom time to convert a substantial majority of our remaining quarterly contracts to annual terms over the next twelve months. In addition,time, we continue to offer limited incentives for customers to enter into contract terms of more than one year, typically for terms of two or three years. Unpaid invoice amounts for services starting in future periods are excluded from accounts receivable and deferred revenue. Invoiced amounts are reflected as accounts receivable once we have initiated services with an offset to deferred revenue or revenue depending on whether the revenue recognition criteria have been met. At December 31, 2017, deferred revenue was $127.4 million. Estimated future recognition from deferred revenue at December 31, 2017 was $104.7 million in 2018, $18.3 million in 2019, and $4.4 million in 2020. Our arrangements do not contain general rights of return.
Subscription and Support Revenue. We recognize the aggregate minimum subscription and support fees ratablyrevenue on a straight-lineratable basis over the subscriptioncontract term providedbeginning on the date that an enforceable contract has been signed by both parties, access to our SaaS solutions has been grantedservice is made available to the customer, the fee for the subscription and support is fixed or determinable, and collection is reasonably assured.customer. Amounts that are invoiced are initially recorded as deferred revenue.
Professional Services Revenue. We believe our professional services facilitate the sale of our subscription service to certain customers. To date, most of our professional services have consisted of document set up, XBRL tagging, and consulting with our customers on business processes and best practices for using Wdesk. Our professional services are not required for customers to utilize our solution. We recognize revenue for our professionaldocument set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services contracts whenare recognized as the services are performed.
Cost of Revenue
Cost of revenue consists primarily of personnel and related costs directly associated with our professional services, customer success teams and training personnel, including salaries, benefits, bonuses, and stock-based compensation; the costs of contracted third-party vendors; the costs of server usage by our customers; information technology costs; and facility costs. Costs of server usage are comprised primarily of fees paid to Google Cloud Platform and Amazon Web Services.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included in this expense are marketing and promotional events, our annual user conference, online marketing, product marketing, information technology costs, and facility costs. We capitalize and amortizeSales commissions paid where the amortization period is one year or less are expensed as incurred. All other sales commissions that are directly attributable toconsidered incremental costs of obtaining a contract with a customer and are deferred and amortized on a straight-line basis over the lessera period of twelve months or the non-cancelable term of the customer contract based on the terms of our commission arrangements.benefit that we have determined to be three years.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, and stock-based compensation; costs of server usage by our developers; information technology costs; and facility costs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and related costs for our executive, finance and accounting, legal, human resources, and administrative personnel, including salaries, benefits, bonuses, and stock-based compensation; legal, accounting, and other professional service fees; other corporate expenses; information technology costs; and facility costs.
Results of Operations
The following table sets forth selected consolidated statement of operations data for each of the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| (in thousands) | | | | |
Revenue | | | | | |
Subscription and support | $ | 200,392 | | $ | 169,283 | | $ | 143,120 |
Professional services | 43,952 | | 38,586 | | 35,526 |
Total revenue | 244,344 | | 207,869 | | 178,646 |
Cost of revenue | | | | | |
Subscription and support(1) | 34,215 | | 32,646 | | 27,895 |
Professional services(1) | 31,645 | | 27,599 | | 23,730 |
Total cost of revenue | 65,860 | | 60,245 | | 51,625 |
Gross profit | 178,484 | | 147,624 | | 127,021 |
Operating expenses | | | | | |
Research and development(1) | 81,602 | | 68,172 | | 57,438 |
Sales and marketing(1) | 90,337 | | 84,161 | | 80,466 |
General and administrative(1) | 56,333 | | 39,594 | | 32,695 |
Total operating expenses | 228,272 | | 191,927 | | 170,599 |
Loss from operations | (49,788) | | (44,303) | | (43,578) |
Interest expense | (1,827) | | (1,845) | | (1,875) |
Other income, net | 1,791 | | 1,783 | | 1,500 |
Loss before provision for income taxes | (49,824) | | (44,365) | | (43,953) |
Provision for income taxes | 247 | | 61 | | 24 |
Net loss | $ | (50,071) | | $ | (44,426) | | $ | (43,977) |
Table of Contents | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Revenue | | | | | |
Subscription and support | $ | 169,283 | | $ | 143,120 | | $ | 116,288 |
Professional services | 38,586 | | 35,526 | | 28,984 |
Total revenue | 207,869 | | 178,646 | | 145,272 |
Cost of revenue | | | | | |
Subscription and support(1) | 32,646 | | 27,895 | | 22,559 |
Professional services(1) | 27,599 | | 23,730 | | 17,645 |
Total cost of revenue | 60,245 | | 51,625 | | 40,204 |
Gross profit | 147,624 | | 127,021 | | 105,068 |
Operating expenses | | | | | |
Research and development(1) | 68,172 | | 57,438 | | 50,466 |
Sales and marketing(1) | 84,161 | | 80,466 | | 69,569 |
General and administrative(1) | 39,594 | | 32,695 | | 28,716 |
Total operating expenses | 191,927 | | 170,599 | | 148,751 |
Loss from operations | (44,303) | | (43,578) | | (43,683) |
Interest expense | (1,845) | | (1,875) | | (2,025) |
Other income, net | 1,783 | | 1,500 | | 2,302 |
Loss before provision for income taxes | (44,365) | | (43,953) | | (43,406) |
Provision (benefit) for income taxes | 61 | | 24 | | (7) |
Net loss | $ | (44,426) | | $ | (43,977) | | $ | (43,399) |
(1) Stock-based compensation expense included in these line items was as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Cost of revenue | | | | | |
Subscription and support | $ | 738 | | $ | 493 | | $ | 363 |
Professional services | 465 | | 411 | | 349 |
Operating expenses | | | | | |
Research and development | 2,224 | | 2,365 | | 1,924 |
Sales and marketing | 2,983 | | 2,075 | | 1,727 |
General and administrative | 13,066 | | 8,903 | | 6,637 |
Total stock-based compensation expense | $ | 19,476 | | $ | 14,247 | | $ | 11,000 |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| (in thousands) | | | | |
Cost of revenue | | | | | |
Subscription and support | $ | 700 | | $ | 738 | | $ | 493 |
Professional services | 619 | | 465 | | 411 |
Operating expenses | | | | | |
Research and development | 5,842 | | 2,224 | | 2,365 |
Sales and marketing | 5,416 | | 2,983 | | 2,075 |
General and administrative | 18,264 | | 13,066 | | 8,903 |
Total stock-based compensation expense | $ | 30,841 | | $ | 19,476 | | $ | 14,247 |
The following table sets forth our consolidated statement of operations data as a percentage of revenue for each of the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Revenue | | | | | |
Subscription and support | 82.0 | % | | 81.4 | % | | 80.1 | % |
Professional services | 18.0 | | | 18.6 | | | 19.9 | |
Total revenue | 100.0 | | | 100.0 | | | 100.0 | |
Cost of revenue | | | | | |
Subscription and support | 14.0 | | | 15.7 | | | 15.6 | |
Professional services | 13.0 | | | 13.3 | | | 13.3 | |
Total cost of revenue | 27.0 | | | 29.0 | | | 28.9 | |
Gross profit | 73.0 | | | 71.0 | | | 71.1 | |
Operating expenses | | | | | |
Research and development | 33.4 | | | 32.8 | | | 32.2 | |
Sales and marketing | 37.0 | | | 40.5 | | | 45.0 | |
General and administrative | 23.1 | | | 19.0 | | | 18.3 | |
Total operating expenses | 93.5 | | | 92.3 | | | 95.5 | |
Loss from operations | (20.5) | | | (21.3) | | | (24.4) | |
Interest expense | (0.7) | | | (0.9) | | | (1.0) | |
Other income and (expense), net | 0.7 | | | 0.9 | | | 0.8 | |
Loss before provision for income taxes | (20.5) | | | (21.3) | | | (24.6) | |
Provision (benefit) for income taxes | 0.1 | | | — | | | — | |
Net loss | (20.6) | % | | (21.3) | % | | (24.6) | % |
Table of Contents | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Revenue | | | | | |
Subscription and support | 81.4 | % | | | 80.1 | % | | | 80.0 | % |
Professional services | 18.6 | | | | 19.9 | | | | 20.0 | |
Total revenue | 100.0 | | | | 100.0 | | | | 100.0 | |
Cost of revenue | | | | | |
Subscription and support | 15.7 | | | | 15.6 | | | | 15.5 | |
Professional services | 13.3 | | | | 13.3 | | | | 12.1 | |
Total cost of revenue | 29.0 | | | | 28.9 | | | | 27.6 | |
Gross profit | 71.0 | | | | 71.1 | | | | 72.4 | |
Operating expenses | | | | | |
Research and development | 32.8 | | | | 32.2 | | | | 34.7 | |
Sales and marketing | 40.5 | | | | 45.0 | | | | 47.9 | |
General and administrative | 19.0 | | | | 18.3 | | | | 19.8 | |
Total operating expenses | 92.3 | | | | 95.5 | | | | 102.4 | |
Loss from operations | (21.3) | | | | (24.4) | | | | (30.0) | |
Interest expense | (0.9) | | | | (1.0) | | | | (1.4) | |
Other income and (expense), net | 0.9 | | | | 0.8 | | | | 1.6 | |
Loss before provision for income taxes | (21.3) | | | | (24.6) | | | | (29.8) | |
Provision for income taxes | — | | | | — | | | | — | |
Net loss | (21.3) | % | | | (24.6) | % | | | (29.8) | % |
| | | | | |
Revenue
Comparison of Years Ended December 31, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2018 | | 2017 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Revenue | | | | | | | |
Subscription and support | $ | 200,392 | | $ | 169,283 | | $ | 31,109 | | 18.4% | |
Professional services | 43,952 | | 38,586 | | 5,366 | | 13.9% | |
Total revenue | $ | 244,344 | | $ | 207,869 | | $ | 36,475 | | 17.5% | |
Total revenue increased $36.5 million in 2018 compared to 2017 due primarily to the increase in subscription and support revenue of $31.1 million. Growth in subscription and support revenue in 2018 was attributable mainly to strong demand and better pricing for a broad range of use cases, including SEC reporting, risk and controls, financial and managerial reporting, and capital markets. The total number of our customers increased 9.0% from December 31, 2017 to December 31, 2018. The growth in professional services revenue was attributable primarily to increased XBRL services. Professional services revenue increased at a slower rate than subscription and support revenue in 2018 compared to 2017. As our customers become familiar with our platform, they typically become more self sufficient and require fewer professional services. We expect the revenue growth rate from subscription and support to continue to outpace revenue growth from professionals services on an annual basis.
For the year ended December 31, 2018, adoption of ASC 606 caused recognition of professional services revenue to be $1.8 million lower than what would have been recognized under the legacy standard. Under ASC 605, revenue from subscription and support and professional services for the year would have been $199.6 million and $45.7 million, respectively, which represents increases of 17.9% and 18.5%, respectively, over the same period a year ago. See Note 1 to our consolidated financial statements for a breakdown of revenue for the current period under ASC 605.
Comparison of Years Ended December 31, 2017 and 2016
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2017 | | 2016 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Revenue | | | | | | | |
Subscription and support | $ | 169,283 | | $ | 143,120 | | $ | 26,163 | | 18.3% | |
Professional services | 38,586 | | 35,526 | | 3,060 | | 8.6% | |
Total revenue | $ | 207,869 | | $ | 178,646 | | $ | 29,223 | | 16.4% | |
Total revenue increased $29.2 million in 2017 compared to 2016 due primarily to the increase in subscription and support revenue of $26.2 million. Of the total increase in subscription and support revenue, 27.7% represented revenue from new customers acquired after December 31, 2016 and 72.3% represented revenue from existing customers at or prior to December 31, 2016. The total number of our customers increased 10.5% from December 31, 2016 to December 31, 2017. The growth in professional services revenue was attributable primarily to increased XBRL services. Professional services revenue increased at a slower rate than subscription and support revenue in 2017 compared to 2016. As our customers become familiar with our platform, they typically become more self sufficient and require fewer professional services.
fewer professional services. We expect the revenue growth rate from subscription and support to continue to outpace revenue growth from professionals services on an annual basis.
Comparison of Years Ended December 31, 2016 and 2015
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Period-to-period change |
| 2016 | | 2015 | | Amount | | % Change |
| (dollars in thousands) | | |
Revenue | | | | | | | |
Subscription and support | $ | 143,120 | | $ | 116,288 | | $ | 26,832 | | 23.1% | |
Professional services | 35,526 | | 28,984 | | 6,542 | | 22.6% | |
Total revenue | $ | 178,646 | | $ | 145,272 | | $ | 33,374 | | 23.0% | |
Total revenue increased $33.4 million in 2016 compared to 2015 due primarily to the increase in subscription and support revenue of $26.8 million. The growth in professional services revenue was attributable mainly to increased consulting and services related to our non-SEC use cases. Of the total increase in subscription and support revenue, 23.5% represented revenue from new customers acquired after December 31, 2015 and 76.5% represented revenue from existing customers at or prior to December 31, 2015. The total number of our customers increased 9.8% from December 31, 2015 to December 31, 2016.
Cost of Revenue
Comparison of Years Ended December 31, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2018 | | 2017 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Cost of revenue | | | | | | | |
Subscription and support | $ | 34,215 | | $ | 32,646 | | $ | 1,569 | | 4.8% | |
Professional services | 31,645 | | 27,599 | | 4,046 | | 14.7% | |
Total cost of revenue | $ | 65,860 | | $ | 60,245 | | $ | 5,615 | | 9.3% | |
Cost of revenue increased $5.6 million in 2018 compared to 2017, due primarily to an increase in employee compensation and benefits of $4.4 million, an increase in server usage costs of $1.3 million, and an increase in outsourced services of $0.8 million, partially offset by a decrease in travel costs of $1.0 million. Subscription and support expense rose 4.8% in the year ended December 31, 2018 compared to the prior year due primarily to increases in employee compensation and the cost of cloud infrastructure services to support our expanding customer base. Professional services expense increased 14.7% in the year ended December 31, 2018 versus the prior year due primarily to an increase in employee compensation and outsourced service fees, partially offset by travel expense. Increased employee compensation related to fulfilling demand for XBRL services and non-SEC consulting services, while the decrease in travel related expenses resulted from performing more consulting work remotely, instead of onsite.
Comparison of Years Ended December 31, 2017 and 2016
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2017 | | 2016 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Cost of revenue | | | | | | | |
Subscription and support | $ | 32,646 | | $ | 27,895 | | $ | 4,751 | | 17.0% | |
Professional services | 27,599 | | 23,730 | | 3,869 | | 16.3% | |
Total cost of revenue | $ | 60,245 | | $ | 51,625 | | $ | 8,620 | | 16.7% | |
Cost of revenue increased $8.6 million in 2017 compared to 2016, due primarily to an increase in headcount, employee compensation, benefits and travel costs of $7.5 million and an increase in server usage costs of $0.7 million to support our expanding customer base. Subscription and support expense rose 17.0% in the year ended December 31, 2017 compared to the prior year due primarily to increases in headcount, employee compensation, and server expenses used to support our expanding customer base. Professional services expense increased 16.3% in the year ended December 31, 2017 versus the prior year due primarily to an increase in headcount, employee compensation and travel expense related to fulfilling demand for XBRL services and non-SEC consulting services.
Operating Expenses
Comparison of Years Ended December 31, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2018 | | 2017 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Operating expenses | | | | | | | |
Research and development | $ | 81,602 | | $ | 68,172 | | $ | 13,430 | | 19.7% | |
Sales and marketing | 90,337 | | 84,161 | | 6,176 | | 7.3% | |
General and administrative | 56,333 | | 39,594 | | 16,739 | | 42.3% | |
Total operating expenses | $ | 228,272 | | $ | 191,927 | | $ | 36,345 | | 18.9% | |
Research and Development
Research and development expenses increased $13.4 million in 2018 compared to 2017 due primarily to $11.2 million in higher cash-based compensation and benefits costs, as well as additional stock-based compensation of $3.6 million. These increases were partially offset by a $2.1 million reduction of consulting fees. Transitioning certain projects to internal teams allowed us to trim consulting fees. We continue to dedicate resources to developing the next generation of Wdesk, which has resulted in increased investment in research and development. In addition, the cost of server usage included in research and development increased $0.6 million during 2018 compared to 2017.
Sales and Marketing
Sales and marketing expenses increased $6.2 million in 2018 compared to 2017 due primarily to $3.9 million in higher employee compensation, benefits and travel costs, as well as additional stock-based compensation of $2.4 million. We expect to continue to invest in sales and marketing employees for future revenue growth. Sales and marketing expense as a percentage of revenue improved to 37.0% during the year ended December 31, 2018 from 40.5% in 2017 due primarily to the capitalization of sales commissions required by ASC 606.
General and Administrative
General and administrative expenses rose $16.7 million in 2018 compared to 2017 due primarily to higher employee cash-based compensation, benefits, and travel costs of $8.9 million, as well as additional stock-based compensation of $5.2 million. In the second quarter of 2018, we recorded an additional $5.9 million and $3.6 million of cash-based and equity-based compensation, respectively, pursuant to a separation agreement with our former CEO. The remaining increase in stock-based compensation was driven primarily by restricted stock grants to certain executive officers in February 2018 that vest after three years.
Comparison of Years Ended December 31, 2016 and 2015
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Period-to-period change |
| 2016 | | 2015 | | Amount | | % Change |
| (dollars in thousands) | | |
Cost of revenue | | | | | | | |
Subscription and support | $ | 27,895 | | $ | 22,559 | | $ | 5,336 | | 23.7% | |
Professional services | 23,730 | | 17,645 | | 6,085 | | 34.5% | |
Total cost of revenue | $ | 51,625 | | $ | 40,204 | | $ | 11,421 | | 28.4% | |
Cost of revenue increased $11.4 million in 2016 compared to 2015, due primarily to an increase in headcount, employee compensation, benefits and travel costs of $9.1 million, an increase in other support costs of $1.3 million, and an increase in server usage costs of $1.3 million. Subscription and support expense rose 23.7% in the year ended December 31, 2016 compared to the prior year due primarily to increases in headcount, employee compensation, and server expenses used to support our expanding customer base. Professional services expense increased 34.5% in the year ended December 31, 2016 versus the prior year due primarily to an increase in headcount, employee compensation and travel expense related to fulfilling increased demand for our non-SEC consulting services.
Operating Expenses
Comparison of Years Ended December 31, 2017 and 2016
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change | | |
| 2017 | | 2016 | | Amount | | % Change |
| (dollars in thousands) | | | | | | |
Operating expenses | | | | | | | |
Research and development | $ | 68,172 | | $ | 57,438 | | $ | 10,734 | | 18.7% | |
Sales and marketing | 84,161 | | 80,466 | | 3,695 | | 4.6% | |
General and administrative | 39,594 | | 32,695 | | 6,899 | | 21.1% | |
Total operating expenses | $ | 191,927 | | $ | 170,599 | | $ | 21,328 | | 12.5% | |
Research and Development
Research and development expenses increased $10.7 million in 2017 compared to 2016 due primarily to $6.5 million in higher headcount, cash-based compensation, benefits, and travel costs and a $3.1 million increase in professional services expense related to an increase in technology consultants. We continue to dedicate resources to developing the next generation of Wdesk, which has resulted in higher headcount and additional consultants in research and development. In addition, the cost of server usage included in research and development increased $0.7 million million during 2017 compared to 2016.
Sales and Marketing
Sales and marketing expenses increased $3.7 million in 2017 compared to 2016 due primarily to $4.9 million in higher employee compensation, benefits and travel costs. The increase in these costs was offset partially by a decline in vendor fees of $0.6 million related to a reduction in consulting and vendor created content and a reduction of $0.3 million in software expenses.Weexpenses. We expect to continue to invest in sales and marketing employees for future revenue growth.
General and Administrative
General and administrative expenses rose $6.9 million in 2017 compared to 2016 due primarily to higher headcount and additional cash-based compensation, benefits, and travel costs of $3.4 million and employee stock-based compensation of $4.0 million. In the fourth quarter of 2017, we recorded an additional $400,000$0.4 million and $1.5 million of cash-based and equity-based compensation, respectively, from certain severance arrangements. The remaining increase in personnel-related costs was driven primarily by a rise in headcount to support the growth of our business and regulatory compliance. The remaining increase in stock-based compensation was driven primarily by restricted stock grants to executive officers in February 2015, January 2016, and January 2017 with a vesting term of three years, as well as stock option grants to executive officersofficer in February 2016 and 2017 with a vesting term of three years.
Non-Operating Income (Expenses)
Comparison of Years Ended December 31, 20162018 and 20152017
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Period-to-period change |
| 2016 | | 2015 | | Amount | | % Change |
| (dollars in thousands) | | |
Operating expenses | | | | | | | |
Research and development | $ | 57,438 | | $ | 50,466 | | $ | 6,972 | | 13.8% | |
Sales and marketing | 80,466 | | 69,569 | | 10,897 | | 15.7% | |
General and administrative | 32,695 | | 28,716 | | 3,979 | | 13.9% | |
Total operating expenses | $ | 170,599 | | $ | 148,751 | | $ | 21,848 | | 14.7% | |
Research and Development
Research and development expenses increased $7.0 million in 2016 compared to 2015 due primarily to $6.7 million in higher employee compensation, benefits, and travel costs. We continued to dedicate resources to enhance our Wdesk platform, which resulted in higher headcount in research and development.
Sales and Marketing
Sales and marketing expenses increased $10.9 million in 2016 compared to 2015 due primarily to $11.5 million in higher employee compensation, benefits and travel costs. The increase in these costs was offset partially by a decline in professional service fees of $0.9 million related to consulting, recruiting and training.
General and Administrative
General and administrative expenses rose $4.0 million in 2016 compared to 2015 due primarily to higher employee cash-based compensation, benefits, and travel costs of $1.0 million and additional employee stock-based compensation of $2.8 million. The increase in personnel-related costs was driven primarily by a rise in headcount to support the growth of our business. Higher stock-based compensation expense was driven primarily by restricted stock grants to executive officers in February 2015 and January 2016 with a vesting term of three years, as well as stock option grants to executive officers in February 2016 with a vesting term of three years.
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change |
| 2018 | | 2017 | | Amount |
| (dollars in thousands) | | | | |
Interest expense | $ | (1,827) | | $ | (1,845) | | $ | 18 |
Other income, net | 1,791 | | 1,783 | | 8 |
Non-OperatingInterest Expense and Other Income, (Expenses)Net
Interest expense and other income, net both remained relatively flat during the year ended December 31, 2018 compared to the prior year.
Comparison of Years Ended December 31, 2017 and 2016
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | Period-to-period change |
| 2017 | | 2016 | | Amount |
| (dollars in thousands) | | | | |
Interest expense | $ | (1,845) | | $ | (1,875) | | $ | 30 |
Other income, net | 1,783 | | 1,500 | | 283 |
Interest Expense and Other Income, Net
Interest expense remained relatively flat during the year ended December 31, 2017 compared to the prior year.same period a year ago.
Other income, net increased $0.3 million in 2017 compared to 2016 due to increases in interest income and in the amount recognized related to our job training reimbursement program. These increases were partially offset by losses on foreign currency transactions.
Comparison of Years Ended December 31, 2016 and 2015
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Period-to-period change |
| 2016 | | 2015 | | Amount |
| (dollars in thousands) |
Interest expense | $ | (1,875) | | $ | (2,025) | | $ | 150 |
Other income, net | 1,500 | | 2,302 | | (802) |
Interest Expense and Other Income, Net
Interest expense remained relatively flat during the year ended December 31, 2016 compared to the same period a year ago.
Other income, net decreased $0.8 million in 2016 compared to 2015 due to recognition in 2015 of our deferred government grant obligation relating to our 2011 Iowa Economic Development award of $1.6 million. This decrease was partially offset by an increase of $0.4 million in the amount recognized related to our job training reimbursement program resulting from the amounts diverted and paid to the community college in the periods.
Quarterly Results of Operations
See “Unaudited Quarterly Results of Operations” included in Note 1315 of this Annual Report on Form 10-K for the unaudited quarterly results of operations for the years ended December 31, 20172018 and 2016.2017.
Liquidity and Capital Resources
| | | Year ended December 31, | | Year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
| | (in thousands) | | (in thousands) | |
Cash flow provided by (used in) operating activities | Cash flow provided by (used in) operating activities | $ | 5,520 | | $ | (10,369) | | $ | (21,592) | Cash flow provided by (used in) operating activities | $ | 6,400 | | $ | 5,520 | | $ | (10,369) |
Cash flow (used in) provided by investing activities | Cash flow (used in) provided by investing activities | (6,473) | | 3,805 | | (19,777) | Cash flow (used in) provided by investing activities | (5,632) | | (6,473) | | 3,805 |
Cash flow provided by (used in) financing activities | Cash flow provided by (used in) financing activities | 9,822 | | (895) | | (1,102) | Cash flow provided by (used in) financing activities | 16,876 | | 9,822 | | (895) |
Net increase (decrease) in cash and cash equivalents, net of impact of exchange rates | Net increase (decrease) in cash and cash equivalents, net of impact of exchange rates | $ | 9,052 | | $ | (7,469) | | $ | (42,381) | Net increase (decrease) in cash and cash equivalents, net of impact of exchange rates | $ | 17,251 | | $ | 9,052 | | $ | (7,469) |
As of December 31, 2017,2018, our cash, cash equivalents, and marketable securities totaled $76.7$98.3 million. To date, we have financed our operations primarily through the proceeds of our initial public offering, private placements of equity, debt that was settled in equity and cash from operating activities. We have generated significant operating losses and negative cash flows from operating activities as reflected in our accumulated deficit and consolidated statements of cash flows. We expect to continue to incur operating losses and may incur negative cash flows from operations in the future. As a result, we may require additional capital resources to continue to grow our business.losses. We believe that current cash and cash equivalents, cash flows from operating activities, availability under our existing credit facility and the ability to offer and sell securities pursuant to our shelf registration statement will be sufficient to fund our operations for at least the next twelve months.
In August 2014, we entered into a $15.0 million credit facility with Silicon Valley Bank. Borrowing capacity is equal to the most recent month’s subscription and support revenue multiplied by a
percentage that adjusts based on the prior quarter’s customer retention rate. The credit facility can be used to fund working capital and general business requirements. The credit facility is secured by all of our assets, has first priority over our other debt obligations, and requires us to maintain certain financial covenants, including the maintenance of at least $5.0 million of cash on hand or unused borrowing capacity. The credit facility contains certain restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, effect changes in management and enter into new businesses. The credit facility has a variable interest rate equal to the bank’s prime lending rate with interest payable monthly and the principal balance due at maturity. The credit facility matures in August 2018, and no amount2020.
Pursuant to the credit facility, a letter of credit totaling $500,000 was outstanding at December 31, 2018. This letter of credit, which reduces the availability under the credit facility, was issued as a maintenance deposit for an office lease. The letter of December 31, 2017.credit expires every year but has a feature that automatically renews the term for an additional year with an ultimate expiration date of February 28, 2030.
We filed a universal shelf registration statement on Form S-3 with the SEC that became effective August 10, 2017. Under the shelf registration statement, we may offer and sell, from time to time in the future in one or more public offerings, our Class A common stock, preferred stock, debt securities, warrants, rights and units. The aggregate initial offering price of all securities sold by us under the shelf registration statement will not exceed $250.0 million.
Operating Activities
For the year ended December 31, 2018, cash provided by operating activities was $6.4 million. The primary factors affecting our operating cash flows during the period were our net loss of $50.1 million, adjusted for non-cash charges of $3.8 million for depreciation and amortization of our property and equipment and intangible assets, $30.8 million of stock-based compensation, and $0.6 million provision for doubtful accounts. The primary drivers of the changes in operating assets and liabilities were a $20.2 million increase in accounts receivable and a $11.2 million increase in deferred commissions, offset by a $2.0 million decrease in prepaid expenses and other, a $1.7 million increase in accounts payable, a $40.1 million increase in deferred revenue, and a $8.9 million increase in accrued expenses and other liabilities. Customer growth and contract renewals for longer terms accounted for most of the increase in deferred revenue. The increase in accounts receivable was attributable primarily to the timing of our billings and cash collections. The increase in accrued expenses and other liabilities was due to increased accrued employee compensation as well as the timing of cash payments. The increase in deferred commissions was primarily due to additional payments made to our sales force related to the direct and incremental costs of obtaining a customer contract. The increase in accounts payable and decrease in prepaid expenses and other were attributable primarily to the timing of our cash payments.
For the year ended December 31, 2017, cash provided by operating activities was $5.5 million. The primary factors affecting our operating cash flows during the period were our net loss of $44.4 million, adjusted for non-cash charges of $3.5 million for depreciation and amortization of our property and equipment and intangible assets, $19.5 million of stock-based compensation, and $1.6 million for recognition of other income from government grants. The primary drivers of the changes in operating assets and liabilities were a $5.5 million increase in accounts receivable and a $0.8 million decrease in accrued expenses and other liabilities offset by a $29.4 million increase in deferred revenue, a $3.0 million decrease in prepaid expenses, and a $2.2 million increase in accounts payable. Short-term deferred revenue from subscription and support contracts increased $28.1 million from December 31,
2016 to December 31, 2017. Long-term deferred revenue from subscription and support contracts
increased by $1.2 million from December 31, 2016 to December 31, 2017. Short-term deferred revenue from professional services increased by $0.1 million from December 31, 2016 to December 31, 2017. Customer growth and contract renewals for longer terms accounted for most of the increase in deferred revenue. The increase in accounts receivable was attributable primarily to the timing of our billings and cash collections. The decrease in accrued expenses and other liabilities was due primarily to the timing of year-end bonus payments for 2017, as we moved the payment of bonuses to eligible non-executive employees from January to December. The decrease in prepaid expenses was due primarily to timing of payments relating to cloud infrastructure services and our annual user conference. The increase in accounts payable was attributable primarily to the timing of our cash payments.
ForInvesting Activities
Cash used in investing activities of $5.6 million for the year ended December 31, 2016, cash used in operating activities was $10.4 million. The primary factors affecting our operating cash flows during the period were our net loss of $44.0 million, adjusted for non-cash charges of $3.8 million for depreciation and amortization of our property and equipment and intangible assets, $14.2 million of stock-based compensation, and $1.1 million for recognition of other income from government grants. The primary drivers of the changes in operating assets and liabilities were a $7.1 million increase in accounts receivable, a $0.7 million increase in other receivables, a $5.5 million increase in prepaid expenses, and a $3.9 million decrease in accounts payable, offset by a $34.2 million increase in deferred revenue. Short-term deferred revenue from subscription and support contracts increased $18.9 million from December 31, 2015 to December 31, 2016. Long-term deferred revenue from subscription and support contracts increased by $13.8 million from December 31, 2015 to December 31, 2016. Short-term deferred revenue from professional services increased by $1.4 million from December 31, 2015 to December 31, 2016. Customer growth and contract renewals for longer terms accounted for most of the increase in deferred revenue. The increase in accounts receivable was attributable primarily to the timing of our billings and cash collections. The increase in other receivables2018 was due primarily to timing$24.7 million for the purchase of health care insurance reimbursements. The increasemarketable securities and $1.1 million of capital expenditures, partially offset by $20.4 million from the maturities of marketable securities. Our capital expenditures were associated primarily with computer equipment and furniture and fixtures in prepaid expenses was due to purchasing server capacity upfront, an upfront payment forsupport of expanding our 2017 annual user conferenceinfrastructure and to the timing of rent and travel payments. The decrease in accounts payable was attributable primarily to the timing of our cash payments.
Investing Activitieswork force.
Cash used in investing activities of $6.5 million for the year ended December 31, 2017 was due primarily to $14.4 million for the purchase of marketable securities and $1.2 million of capital expenditures, partially offset by $9.3 million from the maturities of marketable securities. Our capital expenditures were associated primarily with computer equipment and furniture and fixtures in support of expanding our infrastructure and work force.
Financing Activities
Cash provided by investingfinancing activities of $3.8$16.9 million for the year ended December 31, 20162018 was due primarily to $1.3$16.7 million for thein proceeds from option exercises and $3.2 million in proceeds from shares issued in connection with our employee stock purchase of marketable securitiesplan, partially offset by an aggregate $1.2 million in repayments on long-term debt and payments on capital lease and financing obligations, and $1.9 million in taxes paid related to the net share settlements of capital expenditures, more than offset by proceeds of $7.2 million from the sale of marketable securities. Our capital expenditures were associated primarily with leasehold improvements, computer equipment, and furniture and fixtures in support of expanding our infrastructure and work force.
Financing Activitiesstock-based compensation awards.
Cash provided by financing activities of $9.8 million for the year ended December 31, 2017 was due primarily to $12.5 million in proceeds from option exercises, partially offset by an aggregate $1.5 million in repayments on long-term debt and payments on capital lease and financing obligations and $1.1 million in taxes paid related to the net share settlements of stock-based compensation awards.
Cash used in financing activities of $0.9 million for the year ended December 31, 2016 was due primarily to $0.8 million in taxes paid related to the net share settlements of stock-based compensation awards and an aggregate $1.9 million in repayments on long-term debt and payments on capital lease and financing obligations, partially offset by $1.6 million in proceeds from option exercises.
Contractual Obligations and Commitments
The following table represents our contractual obligations as of December 31, 2017,2018, aggregated by type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (in thousands) | | | | | | | | |
Operating lease obligations relating to office facilities | | $ | 29,203 | | $ | 4,755 | | $ | 7,363 | | $ | 6,392 | | $ | 10,693 |
Financing obligations, including interest for building | | 37,673 | | 2,893 | | 5,786 | | 4,126 | | 24,868 |
Cloud infrastructure services | | 2,672 | | 2,672 | | — | | — | | — |
Total contractual obligations | | $ | 69,548 | | $ | 10,320 | | $ | 13,149 | | $ | 10,518 | | $ | 35,561 |
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (in thousands) |
Operating lease obligations relating to office facilities | | $ | 18,844 | | $ | 3,659 | | $ | 4,865 | | $ | 4,074 | | $ | 6,246 |
Capital lease obligations, including interest for technology and equipment | | 66 | | 66 | | — | | — | | — |
Financing obligations, including interest for building | | 39,382 | | 2,792 | | 5,584 | | 5,356 | | 25,650 |
Cloud infrastructure services | | 8,900 | | 4,100 | | 4,800 | | — | | — |
Total contractual obligations | | $ | 67,192 | | $ | 10,617 | | $ | 15,249 | | $ | 9,430 | | $ | 31,896 |
We have entered into a lease agreement for land and an office building in Ames, Iowa, which was constructed in two phases. The lease term includes an initial 15-year term and three five-year extensions at our option because renewal was determined to be reasonably assured at the inception of the lease. As part of the lease agreement, the landlord was responsible for constructing the building in accordance with our specifications and agreed to fund $11.8 million for the first phase and $11.1 million for the second phase of construction. We were the developer of the project and responsible for construction costs in excess of these amounts. As a result of this involvement, we were required to capitalize the construction costs associated with the office building. The construction liability of $11.8 million was reclassified to a financing obligation and $17.1 million of costs capitalized during construction were placed in service during June 2013 for the first phase. Upon completion of the second phase of the project, the construction liability of $11.1 million was reclassified to a financing obligation, and $19.9 million of costs capitalized during construction were placed in service during 2014.
The lease contains purchase options to acquire the landlord’s interest in the land lease and building at any time beginning three years from June 2014 (the commencement date of the second phase of the lease). In addition, the lease requires us to purchase the building from the landlord upon certain events, such as a change in control. The purchase options were deemed to be fair value at the inception of the lease.
In January 2018, we signed a new lease for approximately 30,000 square feet that will replace our existing offices in Denver and Boulder. The aggregate annual payments under the new lease will be approximately $1.0 million and are subject to annual increases over the lease term, which expires in February 2029.
Off-Balance Sheet Arrangements
During the years ended December 31, 2018, 2017 2016 and 2015,2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 1 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.
Revenue Recognition
We commencegenerate revenue through the sale of our cloud-based software and the delivery of professional services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition for subscriptions to our cloud solutions and professional services when allthrough the following steps:
•Identification of the following criteria are met:
Persuasive evidence of an arrangement exists;The service has beencontract, or is being provided to the customer;contracts, with a customer
Collection•Identification of the fees is reasonably assured; and
The amount of fees to be paid byperformance obligations in the customer is fixed or determinable.contractCollectability is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness•Determination of the customer. Collateral is not requested from the customer. If it is determined that the collectiontransaction price
•Recognition of revenue when, or as, we satisfy a fee is not probable, the revenue is deferred until collection becomes probable, which is generally upon the receipt of cash.performance obligation
Subscription and Support Revenue
We recognize the aggregate minimum subscription and support fees ratablyrevenue on a straight-lineratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription term, provided that an enforceable contract has been signed by both parties,contracts are generally three to 36 months in duration, are billed in advance and are non-cancelable. We consider the access to our SaaS solutions has been grantedWdesk and related support services in a customer contract to be a series of distinct services which comprise a single performance obligation because they are substantially the customer,same and have the fee for the subscription and support is fixed or determinable, and collection is reasonably assured.same pattern of transfer.
Professional Services Revenue and Customer Options
OurProfessional services revenues primarily consist of fees for document set up, XBRL tagging, and consulting with our customers on business processes and best practices for using Wdesk. We have determined that an agreement to purchase these professional services constitutes an option to purchase services in accordance with ASC 606 rather than an agreement that creates enforceable rights and obligations because of the customer's contractual right to cancel services that have not yet been used. In the limited case of agreements where we determined that the option provides the customer with a material right, we allocate a portion of the transaction price to the material right. Professional service agreements that do not contain a material right are not requiredaccounted for customerswhen the customer exercises its option to utilize our solution. We recognize revenuepurchase additional services.
Revenue is recognized for our professionaldocument set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services contracts whenare recognized as the services are performed.
Our professional services revenue is higher in the first calendar quarter because many of our customers employ our professional services just before they file their Form 10-K.
Contracts with Multiple Deliverable Arrangements Performance Obligations
Some of our contracts with customers contain multiple performance obligations in the event that we determine a material right exists. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. For deliverables that have standalone value upon delivery,these contracts, we account for each deliverablethe individual performance obligations separately and recognize revenue for the respective deliverables aswhen they are delivered.
Subscription contracts have standalone value as we sellboth capable of being distinct, whereby the subscriptions separately. In determining whether professionalcustomer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the contract of the contract, whereby the transfer of the services can beis separately identifiable from other promises in the contract. If these criteria are not met, the promised services are accounted for separately from subscription services, we consider the availability of the professional services from other vendors, the nature of our professional services and whether we sell our solutions to new customers without professional services. We have
determined that we have established standalone value for our professional services. This determination was made due primarily to the ability of the customer to complete these tasks without assistance and the sale of services separate from the initial subscription order. Because we established standalone value for our professional services, such service arrangements are being accounted for separately from subscription services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement considerationas a combined performance obligation. The transaction price is allocated to the identified separate units of accounting basedperformance obligations on theira relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relativestandalone selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our best estimate of selling price. The amount of arrangement fee allocated is limited by contingent revenue, if any.
basis. We determine our best estimate ofthe standalone selling price for our deliverablesprices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors. We evaluate our best estimate of selling price by reviewing historical data related to sales of our deliverables, including comparing the percentages of our contract prices to our list prices. We also may consider several other data points in our evaluation,factors, including the size of our arrangements, length of term, the cloud solutions sold, customer demographics and the numbers and types of users within our arrangements.
While changes in assumptions or judgments or changes to the elements of the arrangement could cause an increase or decrease in the amount of revenue that we report in a particular period, these changes have not historically been significant because our recurring revenue is primarily subscription and support revenue.
Stock-Based CompensationDeferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid where the amortization period is one year or less are expensed as incurred. All other sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We measuredetermined the period of benefit by taking into consideration our standard contract terms and recognize compensation expense for all stock-based awards granted to our employees, non-employee directors,conditions, rate of technological change and other service providers based on the estimated fair value of the award on the grant date or reporting date, if required to be remeasured under the guidance. We utilize stock-based compensationfactors. Amortization expense is included in sales and marketing expenses in the formaccompanying consolidated statements of restricted stock awards, restricted stock units, options to purchase Class A common stock and ESPP purchase rights. The fair value of each stock option award and ESPP purchase right is determined at the date of grant by applying the Black-Scholes option pricing model. The fair value of each restricted stock award is based on the number of shares granted and the closing price of our Class A common stock as reported on the New York Stock Exchange on the date of grant. The fair value of these awards is recognized as an expense on a straight line basis over the requisite service period.
All stock-based awards made since the date of our initial public offering have been for Class A common stock. All references to common stock in this “Stock-Based Compensation” section are to our Class A common stock and Class B common stock, as applicable.
Our option pricing model requires the input of highly subjective assumptions, including the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
Fair Value of Our Common Stock: The fair value of our common stock is based on the closing price of our Class A common stock on the New York Stock Exchange.Risk-Free Interest Rate: We base the risk-free interest rate used in the Black-Scholes option pricing model on the implied yield available on U.S. Treasury STRIPS with remaining terms similar to the expected term on the options.Expected Term: We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award.Volatility: Due to the limited trading history of our common stock, we estimate volatility for option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the option grant for a term that is approximately equal to the options’ expected life.Dividend yield: We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
Please refer to Note 8 of the notes to consolidated financial statements for additional information on our estimates related to stock-based compensation.operations.
Recent Accounting Pronouncements
Refer to Note 1 of the notes to consolidated financial statements for a full description of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency rates, although we also have some exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Foreign Currency Risk
Our sales contracts are denominated predominantly in U.S. dollars and, to a lesser extent, the Canadian dollar, Euro, and British Pound Sterling. Consequently, our customer billings denominated in foreign currency are subject to foreign currency exchange risk. A portion of our operating expenses is incurred outside the United States and is denominated in foreign currencies. These operating expenses are also subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian dollar, Euro, and British pound. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, we have not entered into derivatives or hedging transactions as our exposure to foreign currency exchange rates has not been material to our historical operating results, but we may do so in the future if our exposure to foreign currency should become more significant. Foreign currency transaction gains (losses) are included in net loss and were $289,000, $(372,000), $67,000 and $(293,000)$67,000 in the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
Inflation Risk
Inflationary factors, such as increases in our operating expenses, may adversely affect our results of operations, as our customers typically purchase services from us on a subscription basis over a period of time. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, an increase in the rate of inflation in the future may have an adverse effect on our levels of operating expenses as a percentage of revenue if we are unable to increase the prices for our subscription-based solutions to keep pace with these increased expenses.
Interest Rate Risk
As part of our build-to-suit lease arrangement, in addition to the base rent amount, we are responsible for the underlying mortgage held by the lessor, a portion of which is subject to a variable interest rate equal to the prime lending rate plus 1%. In addition, in August 2014, we entered into a $15.0 million credit facility. The credit facility is denominated in U.S. dollars and borrowings are subject to a variable interest rate equal to the prime lending rate. A hypothetical 10% increase or decrease in interest rates after December 31, 20172018 would not have a material impact on our results of operations, our cash flows or the fair values of our outstanding debt or financing obligations.
Interest Rate Sensitivity
We had cash, cash equivalents and marketable securities totaling $76.7$98.3 million as of December 31, 2017.2018. The cash, cash equivalents and marketable securities are held for working capital purposes. Our investments are made primarily for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash and cash equivalents consist primarily of cash and money market funds. Our exposure to market risk for changes in interest rates is limited because our cash and cash equivalents have a short-term maturity and are used primarily for working capital purposes.
Our portfolio of marketable securities was invested primarily in commercial paper and U.S. corporate and U.S. treasury debt securities and is subject to market risk due primarily to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Accordingly, our future
rates. Accordingly, our future investment income may fluctuate as a result of changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value as a result of changes in interest rates. However, because we classify our marketable securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
An immediate increase of 100-basis points in interest rates would have resulted in an $166,000$87,000 market value reduction in our investment portfolio as of December 31, 2017.2018. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors and Stockholders of Workiva Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Workiva Inc. (the Company) as of December 31, 20172018 and 2016, and2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017,2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 201820, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2010.
Chicago, Illinois
February 22, 201820, 2019
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors and Stockholders ofWorkiva Inc.
Opinion on Internal Control over Financial Reporting
We have audited Workiva Inc.'s (the Company) internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the CompanyWorkiva Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172018 and 2016, and2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 20172018, and the related notes and our report dated February 22, 201820, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 22, 201820, 2019
| | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED BALANCE SHEETS | | | |
(in thousands, except share and per share amounts) | | | |
| As of December 31, | | |
| 2018 | | 2017 |
ASSETS | | | |
| | | |
Current assets | | | |
Cash and cash equivalents | $ | 77,584 | | $ | 60,333 |
Marketable securities | 20,764 | | 16,364 |
Accounts receivable, net of allowance for doubtful accounts of $956 and $388 at December 31, 2018 and 2017, respectively | 65,107 | | 28,800 |
Deferred commissions | 8,178 | | 2,376 |
Other receivables | 1,181 | | 975 |
Prepaid expenses and other | 4,417 | | 6,444 |
Total current assets | 177,231 | | 115,292 |
| | | |
| | | |
Property and equipment, net | 41,468 | | 40,444 |
Deferred commissions, non-current | 10,569 | | — |
Intangible assets, net | 1,266 | | 1,118 |
Other assets | 577 | | 861 |
Total assets | $ | 231,111 | | $ | 157,715 |
| | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED BALANCE SHEETS (continued) | | | |
(in thousands, except share and per share amounts) | | | |
| As of December 31, | | |
| 2018 | | 2017 |
| | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
| | | |
Current liabilities | | | |
Accounts payable | $ | 5,461 | | $ | 3,060 |
Accrued expenses and other current liabilities | 36,353 | | 20,429 |
Deferred revenue | 148,545 | | 104,684 |
Current portion of capital lease and financing obligations | 1,222 | | 1,168 |
| | | |
Total current liabilities | 191,581 | | 129,341 |
| | | |
Deferred revenue, non-current | 25,171 | | 22,709 |
Other long-term liabilities | 6,891 | | 4,174 |
Capital lease and financing obligations | 17,208 | | 18,425 |
| | | |
Total liabilities | 240,851 | | 174,649 |
| | | |
Stockholders’ deficit | | | |
Class A common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 34,498,391 and 32,165,407 shares issued and outstanding at December 31, 2018 and 2017, respectively | 34 | | 32 |
Class B common stock, $0.001 par value per share, 500,000,000 shares authorized, 9,545,596 and 10,203,371 shares issued and outstanding at December 31, 2018 and 2017, respectively | 10 | | 10 |
Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding | — | | — |
Additional paid-in-capital | 297,145 | | 248,289 |
Accumulated deficit | (307,027) | | (265,337) |
Accumulated other comprehensive income | 98 | | 72 |
Total stockholders’ deficit | (9,740) | | (16,934) |
Total liabilities and stockholders’ deficit | $ | 231,111 | | $ | 157,715 |
See accompanying notes.
| | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Revenue | | | | | |
Subscription and support | $ | 200,392 | | $ | 169,283 | | $ | 143,120 |
Professional services | 43,952 | | 38,586 | | 35,526 |
Total revenue | 244,344 | | 207,869 | | 178,646 |
Cost of revenue | | | | | |
Subscription and support | 34,215 | | 32,646 | | 27,895 |
Professional services | 31,645 | | 27,599 | | 23,730 |
Total cost of revenue | 65,860 | | 60,245 | | 51,625 |
Gross profit | 178,484 | | 147,624 | | 127,021 |
Operating expenses | | | | | |
Research and development | 81,602 | | 68,172 | | 57,438 |
Sales and marketing | 90,337 | | 84,161 | | 80,466 |
General and administrative | 56,333 | | 39,594 | | 32,695 |
Total operating expenses | 228,272 | | 191,927 | | 170,599 |
Loss from operations | (49,788) | | (44,303) | | (43,578) |
Interest expense | (1,827) | | (1,845) | | (1,875) |
Other income, net | 1,791 | | 1,783 | | 1,500 |
Loss before provision for income taxes | (49,824) | | (44,365) | | (43,953) |
Provision for income taxes | 247 | | 61 | | 24 |
Net loss | $ | (50,071) | | $ | (44,426) | | $ | (43,977) |
Net loss per common share: | | | | | |
Basic and diluted | $ | (1.15) | | $ | (1.07) | | $ | (1.08) |
Weighted-average common shares outstanding - basic and diluted | 43,640,408 | | 41,618,838 | | 40,671,133 |
See accompanying notes.
| | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Net loss | $ | (50,071) | | $ | (44,426) | | $ | (43,977) |
Other comprehensive income (loss), net of tax | | | | | |
Foreign currency translation adjustment, net of income tax (expense) of (9), ($2), and ($13) for the years ended December 31, 2018, 2017 and 2016, respectively | 26 | | (159) | | 18 |
Unrealized gain (loss) on available-for-sale securities, net of income tax (expense) benefit of $0, $2, and ($19) for the years ended December 31, 2018, 2017 and 2016, respectively | — | | (60) | | 32 |
| | | | | |
| | | | | |
Other comprehensive income (loss), net of tax | 26 | | (219) | | 50 |
Comprehensive loss | $ | (50,045) | | $ | (44,645) | | $ | (43,927) |
See accompanying notes.
| | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED BALANCE SHEETS |
(in thousands, except share and per share amounts) |
| As of December 31, |
| 2017 | | 2016 |
ASSETS | | | |
| | | |
Current assets | | | |
Cash and cash equivalents | $ | 60,333 | | $ | 51,281 |
Marketable securities | 16,364 | | 11,435 |
Accounts receivable, net of allowance for doubtful accounts of $388 and $900 at December 31, 2017 and December 31, 2016, respectively | 28,800 | | 22,535 |
Deferred commissions | 2,376 | | 1,864 |
Other receivables | 975 | | 1,545 |
Prepaid expenses | 6,444 | | 9,382 |
Total current assets | 115,292 | | 98,042 |
| | | |
Property and equipment, net | 40,444 | | 42,590 |
Intangible assets, net | 1,118 | | 1,012 |
Other assets | 861 | | 1,499 |
Total assets | $ | 157,715 | | $ | 143,143 |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) | | | | | | | | | | | |
| Common Stock (Class A and B) | | | | Additional Paid-in-Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders' Equity (Deficit) |
| Shares | | Amount | | | | | | | | |
Balances at December 31, 2015 | 40,948 | | $ | 41 | | $ | 202,371 | | $ | 241 | | $ | (176,934) | | $ | 25,719 |
Stock-based compensation expense | — | | — | | 14,247 | | — | | — | | 14,247 |
Issuance of common stock upon exercise of stock options | 374 | | — | | 1,597 | | — | | — | | 1,597 |
Tax withholdings related to net share settlements of stock-based compensation awards | (61) | | — | | (761) | | — | | — | | (761) |
Net loss | — | | — | | — | | — | | (43,977) | | (43,977) |
Other comprehensive income | — | | — | | — | | 50 | | — | | 50 |
Balances at December 31, 2016 | 41,261 | | $ | 41 | | $ | 217,454 | | $ | 291 | | $ | (220,911) | | $ | (3,125) |
Stock-based compensation expense | — | | — | | 19,476 | | — | | — | | 19,476 |
Issuance of common stock upon exercise of stock options | 1,159 | | 1 | | 12,484 | | — | | — | | 12,485 |
Issuance of restricted stock units | 30 | | — | | — | | — | | — | | — |
Tax withholdings related to net share settlements of stock-based compensation awards | (81) | | — | | (1,125) | | — | | — | | (1,125) |
Net loss | — | | — | | — | | — | | (44,426) | | (44,426) |
Other comprehensive loss | — | | — | | — | | (219) | | — | | (219) |
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 | — | | — | | 30,841 | | — | | — | | 30,841 |
Issuance of common stock upon exercise of stock options | 1,481 | | 2 | | 16,660 | | — | | — | | 16,662 |
Issuance of common stock under employee stock purchase plan | 179 | | — | | 3,216 | | — | | — | | 3,216 |
Issuance of restricted stock units | 99 | | — | | — | | — | | — | | — |
Tax withholdings related to net share settlements of stock-based compensation awards | (84) | | — | | (1,861) | | — | | — | | (1,861) |
Net loss | — | | — | | — | | — | | (50,071) | | (50,071) |
Other comprehensive income | — | | — | | — | | 26 | | — | | 26 |
Balances at December 31, 2018 | 44,044 | | $ | 44 | | $ | 297,145 | | $ | 98 | | $ | (307,027) | | $ | (9,740) |
See accompanying notes.
| | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED BALANCE SHEETS (continued) |
(in thousands, except share and per share amounts) |
| As of December 31, |
| 2017 | | 2016 |
| | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| | | |
Current liabilities | | | |
Accounts payable | $ | 3,060 | | $ | 849 |
Accrued expenses and other current liabilities | 20,212 | | 20,695 |
Deferred revenue | 104,684 | | 76,016 |
Deferred government grant obligation | 217 | | 1,022 |
Current portion of capital lease and financing obligations | 1,168 | | 1,285 |
Current portion of long-term debt | — | | 20 |
Total current liabilities | 129,341 | | 99,887 |
| | | |
Deferred revenue | 22,709 | | 21,485 |
Deferred government grant obligation | 278 | | 1,000 |
Other long-term liabilities | 3,896 | | 4,100 |
Capital lease and financing obligations | 18,425 | | 19,743 |
Long-term debt | — | | 53 |
Total liabilities | 174,649 | | 146,268 |
| | | |
Stockholders’ deficit | | | |
Class A common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 32,165,407 and 30,369,199 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | 32 | | 30 |
Class B common stock, $0.001 par value per share, 500,000,000 shares authorized, 10,203,371 and 10,891,888 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | 10 | | 11 |
Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding | — | | — |
Additional paid-in-capital | 248,289 | | 217,454 |
Accumulated deficit | (265,337) | | (220,911) |
Accumulated other comprehensive income | 72 | | 291 |
Total stockholders’ deficit | (16,934) | | (3,125) |
Total liabilities and stockholders’ deficit | $ | 157,715 | | $ | 143,143 |
See accompanying notes.
| | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | |
(in thousands) | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Cash flows from operating activities | | | | | |
Net loss | $ | (50,071) | | $ | (44,426) | | $ | (43,977) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | |
Depreciation and amortization | 3,781 | | 3,546 | | 3,820 |
Stock-based compensation expense | 30,841 | | 19,476 | | 14,247 |
Provision for (recovery of) doubtful accounts | 550 | | (517) | | 185 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Realized gain on sale of available-for-sale securities, net | — | | — | | (6) |
(Accretion) amortization of premiums and discounts on marketable securities, net | (141) | | 101 | | 147 |
Recognition of deferred government grant obligation | — | | (1,578) | | (1,141) |
Deferred income tax | (9) | | — | | (32) |
Changes in assets and liabilities: | | | | | |
Accounts receivable | (20,216) | | (5,546) | | (7,101) |
Deferred commissions | (11,155) | | (498) | | (497) |
Other receivables | (205) | | 577 | | (732) |
Prepaid expenses and other | 2,020 | | 2,952 | | (5,513) |
Other assets | 276 | | 618 | | (654) |
Accounts payable | 1,699 | | 2,206 | | (3,930) |
Deferred revenue | 40,144 | | 29,367 | | 34,211 |
Accrued expenses and other liabilities | 8,886 | | (758) | | 604 |
| | | | | |
Net cash provided by (used in) operating activities | 6,400 | | 5,520 | | (10,369) |
| | | | | |
Cash flows from investing activities | | | | | |
Purchase of property and equipment | (1,122) | | (1,188) | | (1,901) |
Purchase of marketable securities | (24,659) | | (14,369) | | (1,301) |
Maturities of marketable securities | 20,400 | | 9,281 | | — |
Sale of marketable securities | — | | — | | 7,197 |
Purchase of intangible assets | (251) | | (197) | | (190) |
Net cash (used in) provided by investing activities | (5,632) | | (6,473) | | 3,805 |
| | | | | |
| | | | | | | | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(in thousands, except share and per share amounts) |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Revenue | | | | | |
Subscription and support | $ | 169,283 | | $ | 143,120 | | $ | 116,288 |
Professional services | 38,586 | | 35,526 | | 28,984 |
Total revenue | 207,869 | | 178,646 | | 145,272 |
Cost of revenue | | | | | |
Subscription and support | 32,646 | | 27,895 | | 22,559 |
Professional services | 27,599 | | 23,730 | | 17,645 |
Total cost of revenue | 60,245 | | 51,625 | | 40,204 |
Gross profit | 147,624 | | 127,021 | | 105,068 |
Operating expenses | | | | | |
Research and development | 68,172 | | 57,438 | | 50,466 |
Sales and marketing | 84,161 | | 80,466 | | 69,569 |
General and administrative | 39,594 | | 32,695 | | 28,716 |
Total operating expenses | 191,927 | | 170,599 | | 148,751 |
Loss from operations | (44,303) | | (43,578) | | (43,683) |
Interest expense | (1,845) | | (1,875) | | (2,025) |
Other income, net | 1,783 | | 1,500 | | 2,302 |
Loss before provision (benefit) for income taxes | (44,365) | | (43,953) | | (43,406) |
Provision (benefit) for income taxes | 61 | | 24 | | (7) |
Net loss | $ | (44,426) | | $ | (43,977) | | $ | (43,399) |
Net loss per common share: | | | | | |
Basic and diluted | $ | (1.07) | | $ | (1.08) | | $ | (1.09) |
Weighted-average common shares outstanding - basic and diluted | 41,618,838 | | 40,671,133 | | 39,852,624 |
| | | | | | | | | | | | | | | | | |
WORKIVA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | | | | | |
(in thousands) | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Cash flows from financing activities | | | | | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from option exercises | 16,662 | | 12,485 | | 1,597 |
Taxes paid related to net share settlements of stock-based compensation awards | (1,861) | | (1,125) | | (761) |
Proceeds from shares issued in connection with employee stock purchase plan | 3,216 | | — | | — |
| | | | | |
Repayment of other long-term debt | — | | (73) | | (18) |
Principal payments on capital lease and financing obligations | (1,163) | | (1,435) | | (1,863) |
Proceeds from government grants | 22 | | 51 | | 183 |
Deferred financing costs | — | | (81) | | (33) |
| | | | | |
| | | | | |
Net cash provided by (used in) financing activities | 16,876 | | 9,822 | | (895) |
Effect of foreign exchange rates on cash | (393) | | 183 | | (10) |
| | | | | |
Net increase (decrease) in cash and cash equivalents | 17,251 | | 9,052 | | (7,469) |
Cash and cash equivalents at beginning of year | 60,333 | | 51,281 | | 58,750 |
Cash and cash equivalents at end of year | $ | 77,584 | | $ | 60,333 | | $ | 51,281 |
| | | | | |
Supplemental cash flow disclosure | | | | | |
Cash paid for interest | $ | 1,734 | | $ | 1,627 | | $ | 1,835 |
Cash paid for income taxes, net of refunds | $ | 67 | | $ | 42 | | $ | 47 |
| | | | | |
Supplemental disclosure of noncash investing and financing activities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Allowance for tenant improvements | $ | 2,192 | | $ | — | | $ | 481 |
Purchases of property and equipment, accrued but not paid | $ | 1,287 | | $ | — | | $ | — |
See accompanying notes.
| | | | | | | | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
(in thousands) |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Net loss | $ | (44,426) | | $ | (43,977) | | $ | (43,399) |
Other comprehensive (loss) income, net of tax | | | | | |
Foreign currency translation adjustment, net of income tax (expense) of ($2), ($13) and ($101) for the years ended December 31, 2017, 2016 and 2015, respectively | (159) | | 18 | | 133 |
Unrealized gain (loss) on available-for-sale securities, net of income tax (expense) benefit of $2, ($19), and $25 for the years ended December 31, 2017, 2016 and 2015, respectively | (60) | | 32 | | (39) |
| | | | | |
| | | | | |
Other comprehensive (loss) income, net of tax | (219) | | 50 | | 94 |
Comprehensive loss | $ | (44,645) | | $ | (43,927) | | $ | (43,305) |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) |
(in thousands) |
| Common Stock (Class A and B) | | Additional Paid-in-Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders' Equity (Deficit) |
| Shares | | Amount | | | | |
Balances at December 31, 2014 | 39,641 | | $ | 39 | | $ | 189,168 | | $ | 147 | | $ | (133,535) | | $ | 55,819 |
Stock-based compensation expense | — | | — | | 11,000 | | — | | — | | 11,000 |
Grant of restricted stock award | 600 | | — | | — | | — | | — | | — |
Issuance of common stock upon exercise of stock options | 707 | | 2 | | 2,242 | | — | | — | | 2,244 |
Net loss | — | | — | | — | | — | | (43,399) | | (43,399) |
Distribution to members | — | | — | | (35) | | — | | — | | (35) |
Cost of offering | — | | — | | (4) | | — | | — | | (4) |
Other comprehensive income | — | | — | | — | | 94 | | — | | 94 |
Balances at December 31, 2015 | 40,948 | | $ | 41 | | $ | 202,371 | | $ | 241 | | $ | (176,934) | | $ | 25,719 |
Stock-based compensation expense | — | | — | | 14,247 | | — | | — | | 14,247 |
Issuance of common stock upon exercise of stock options | 374 | | — | | 1,597 | | — | | — | | 1,597 |
Tax withholdings related to net share settlements of stock-based compensation awards | (61) | | — | | (761) | | — | | — | | (761) |
Net loss | — | | — | | — | | — | | (43,977) | | (43,977) |
Other comprehensive income | — | | — | | — | | 50 | | — | | 50 |
Balances at December 31, 2016 | 41,261 | | $ | 41 | | $ | 217,454 | | $ | 291 | | $ | (220,911) | | $ | (3,125) |
Stock-based compensation expense | — | | — | | 19,476 | | — | | — | | 19,476 |
Issuance of common stock upon exercise of stock options | 1,159 | | 1 | | 12,484 | | — | | — | | 12,485 |
Issuance of restricted stock units | 30 | | — | | — | | — | | — | | — |
Tax withholdings related to net share settlements of stock-based compensation awards | (81) | | — | | (1,125) | | — | | — | | (1,125) |
Net loss | — | | — | | — | | — | | (44,426) | | (44,426) |
Other comprehensive loss | — | | — | | — | | (219) | | — | | (219) |
Balances at December 31, 2017 | 42,369 | | $ | 42 | | $ | 248,289 | | $ | 72 | | $ | (265,337) | | $ | (16,934) |
See accompanying notes.
| | | | | | | | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(in thousands) |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Cash flows from operating activities | | | | | |
Net loss | $ | (44,426) | | $ | (43,977) | | $ | (43,399) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | |
Depreciation and amortization | 3,546 | | 3,820 | | 4,410 |
Stock-based compensation expense | 19,476 | | 14,247 | | 11,000 |
(Recovery of) provision for doubtful accounts | (517) | | 185 | | 449 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Realized gain on sale of available-for-sale securities, net | — | | (6) | | (13) |
Amortization of premiums and discounts on marketable securities, net | 101 | | 147 | | 77 |
Recognition of deferred government grant obligation | (1,578) | | (1,141) | | (2,383) |
Deferred income tax | — | | (32) | | (76) |
Changes in assets and liabilities: | | | | | |
Accounts receivable | (5,546) | | (7,101) | | (5,080) |
Deferred commissions | (498) | | (497) | | (520) |
Other receivables | 577 | | (732) | | (523) |
Prepaid expenses | 2,952 | | (5,513) | | (734) |
Other assets | 618 | | (654) | | 81 |
Accounts payable | 2,206 | | (3,930) | | 2,331 |
Deferred revenue | 29,367 | | 34,211 | | 7,297 |
Accrued expenses and other liabilities | (758) | | 604 | | 5,390 |
Change in restricted cash | — | | — | | 101 |
Net cash provided by (used in) operating activities | 5,520 | | (10,369) | | (21,592) |
| | | | | |
Cash flows from investing activities | | | | | |
Purchase of property and equipment | (1,188) | | (1,901) | | (1,843) |
Purchase of marketable securities | (14,369) | | (1,301) | | (24,069) |
Maturities of marketable securities | 9,281 | | — | | — |
Sale of marketable securities | — | | 7,197 | | 6,521 |
Purchase of intangible assets | (197) | | (190) | | (386) |
Net cash (used in) provided by investing activities | (6,473) | | 3,805 | | (19,777) |
| | | | | | | | | | | | | | | | | |
WORKIVA INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
(in thousands) |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Cash flows from financing activities | | | | | |
Payment of equity issuance costs | — | | — | | (1,346) |
Proceeds from option exercises | 12,485 | | 1,597 | | 2,244 |
Taxes paid related to net share settlements of stock-based compensation awards | (1,125) | | (761) | | — |
Changes in restricted cash | — | | — | | 300 |
Repayment of other long-term debt | (73) | | (18) | | (84) |
Principal payments on capital lease and financing obligations | (1,435) | | (1,863) | | (2,282) |
Distributions to members | — | | — | | (381) |
Proceeds from government grants | 51 | | 183 | | 548 |
Deferred financing costs | (81) | | (33) | | — |
Repayment of government grant | — | | — | | (101) |
Net cash provided by (used in) financing activities | 9,822 | | (895) | | (1,102) |
Effect of foreign exchange rates on cash | 183 | | (10) | | 90 |
| | | | | |
Net increase (decrease) in cash and cash equivalents | 9,052 | | (7,469) | | (42,381) |
Cash and cash equivalents at beginning of year | 51,281 | | 58,750 | | 101,131 |
Cash and cash equivalents at end of year | $ | 60,333 | | $ | 51,281 | | $ | 58,750 |
| | | | | |
Supplemental cash flow disclosure | | | | | |
Cash paid for interest | $ | 1,627 | | $ | 1,835 | | $ | 2,048 |
Cash paid for income taxes, net of refunds | $ | 42 | | $ | 47 | | $ | 64 |
| | | | | |
Supplemental disclosure of noncash investing and financing activities | | | | | |
Fixed assets acquired through capital lease arrangements | $ | — | | $ | — | | $ | 527 |
Government grant recorded against property and equipment, net | $ | — | | $ | — | | $ | 908 |
Allowance for tenant improvements | $ | — | | $ | 481 | | $ | 698 |
Purchases of property and equipment, accrued but not paid | $ | — | | $ | — | | $ | 354 |
See accompanying notes.
WORKIVA INC.
NOTESNOTED TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Workiva Inc., a Delaware corporation, and its wholly-owned subsidiaries (the "Company"“Company” or "we"“we” or "us"“us”) createdis a leading provider of cloud-based solutions for connected data, reporting and compliance. Our platform, Wdesk, an intuitive cloud platform that modernizes how people work withinis used by thousands of organizations.public and private companies, government agencies and higher-education institutions. Wdesk is built on a data management engine, offeringoffers controlled collaboration, data connections,linking, data integrations, granular permissions, process management and a full audit trail. We offer Wdesk solutions for a wide range of use casessell to customers in the following markets:areas of: finance and accounting, audit and internal controls,accounting; risk and compliancecontrols; regulatory reporting; financial close, management and performance reporting; and managementstatutory 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.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of Workiva Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Additionally, certain prior year 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.
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 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 for cash bonuses to employees during the first and fourth calendar quarters may result in some seasonality in operating cash flow.
Foreign Currency
We translate the financial statements of our foreign subsidiaries, which have a functional currency in the respective country’s local currency, to U.S. dollars using month-end exchange rates for assets and liabilities and average exchange rates for revenue, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income as a component of stockholders’ equity.deficit. Gains and losses resulting from foreign currency transactions that are denominated in currencies other than the entity's functional currency are included within “Other income, net” on the consolidated statements of operations. We recorded $289,000, $(372,000), $67,000 and $(293,000)$67,000 of transaction gains (losses) gains during the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
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, collectability of accounts receivable, valuation of available-for-sale marketable securities, useful lives of deferred contract costs, intangible assets and property and equipment, income taxes and certain assumptions used in the valuation of equity awards. While these estimates are based on our best knowledge of current events and actions that may affect us in the future, actual results may differ materially from these estimates.
Cash and Cash Equivalents
Cash consists of cash on deposit with banks that is stated at cost, which approximates fair value. We invest our excess cash primarily in highly liquid money market funds and marketable securities. We classify all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months as marketable securities.
Marketable Securities
Our marketable securities consist of commercial paper, U.S. corporate debt securities, and U.S. treasury debt securities. We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our investments, including securities with maturities beyond twelve months as current assets in the accompanying consolidated balance sheets. Available-for-sale securities are recorded at fair value each reporting period. Unrealized gains and losses are excluded from earnings and recorded as a separate component within “Accumulated other comprehensive income” on the consolidated balance sheets until realized. Dividend income is reported within “Other income, net” on the consolidated statements of operations. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in “Other income, net” on the consolidated statements of operations.
Fair Value of Financial Instruments
Our financial assets, which include cash equivalents and marketable securities, are measured and recorded at fair value on a recurring basis. Our other current financial assets and our other current financial liabilities have fair values that approximate their carrying value due to their short-term maturities.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with high credit-quality financial institutions. Such deposits may be in excess of federally insured limits. To date, we have not experienced any losses on our cash and cash equivalents. We perform periodic evaluations of the relative credit standing of the financial institutions.
Our accounts receivable are derived primarily from customers located in North America. We perform ongoing credit evaluations of our customers’ financial condition and require no collateral from our customers. We maintain an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable balances. We did not have a significant concentration of accounts receivable from any single customer or from customers in any single country outside of the United States at December 31, 20172018 or 2016.2017.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid where the amortization period is one year or less are expensed as incurred. All other sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our standard contract terms and conditions, rate of technological change and other factors. Amortization expense is included in sales and marketing expense in the accompanying consolidated statements of operations.
Property and Equipment, net
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to ten years. We amortize leasehold improvements and assets under capital leases or financing arrangements over the lesser of the term of the lease including renewal options that are reasonably assured or the estimated useful life of the assets. Depreciation and amortization expense totaled $3.4 million, $3.7$3.4 million and $4.4$3.7 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively, and included $1.3 million, $1.6 million $2.1 million and $2.4$2.1 million of amortization of assets recorded under capital leases during the years ended December 31, 2018, 2017 and 2016, and 2015, respectively.
Revenue Recognition
We generate revenue through the sale of subscriptions to our cloud-based software and the delivery of professional services. Our customer contracts typically rangeWe recognize revenue when control of these services is transferred to our customers in length from threean amount that reflects the consideration we expect to 36 months. Our arrangements do not contain general rights of return. Our subscription contracts do not provide customers withbe entitled to in exchange for those services.
We determine revenue recognition through the right to take possessionfollowing steps:
•Identification of the software supportingcontract, or contracts, with a customer
•Identification of the applications and,performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a result, are accounted for as service contracts.performance obligation
We commencereport revenue recognition for subscriptions to our cloud applications and professional services when all of the following criteria are met:
There is persuasive evidence of an arrangement;The service has been or is being provided to the customer;Collection of the fees is reasonably assured; andThe amount of fees to be paid by the customer is fixed or determinable.
Collectability is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. Collateral is not requested from the customer. If it is determined that the collection of a fee is not probable, the revenue is deferred until collection becomes probable, which is generally upon the receipt of cash.
Revenue is reported net of sales and other taxes collected from customers to be remitted to government authorities.
Subscription and Support Revenue
We recognize the aggregate minimum subscription and support fees ratablyrevenue on a straight-lineratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription term, provided that an enforceable contract has been signed by both parties,contracts are generally three to 36 months in duration, are billed in advance and are non-cancelable. We consider the access to our SaaS solutions has been grantedWdesk and related support services in a customer contract to be a series of distinct services which comprise a single performance obligation because they are substantially the customer,same and have the fee for the subscription and support is fixed or determinable, and collection is reasonably assured.same pattern of transfer.
Professional Services Revenue and Customer Options
Professional services revenues primarily consist of fees for document set up, XBRL tagging, and consulting with our customers on business processes and best practices for using Wdesk. We recognize revenue for ourhave determined that an agreement to purchase these professional services contractsconstitutes an option to purchase services in accordance with ASC 606 rather than an agreement that creates enforceable rights and
obligations because of the customer's contractual right to cancel services that have not yet been used. In the limited case of agreements where we determined that the option provides the customer with a material right, we allocate a portion of the transaction price to the material right. Professional service agreements that do not contain a material right are accounted for when the customer exercises its option to purchase additional services. Revenue is recognized for document set ups when the service is complete and control has transferred to the customer. Revenues from XBRL tagging and consulting services are recognized as the services are performed.
Contracts with Multiple Deliverable ArrangementsPerformance Obligations
Some of our contracts with customers contain multiple performance obligation in the event that we determine a material right exists. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. For deliverables that have standalone value upon delivery,these contracts, we account for each deliverablethe individual performance obligations separately and recognize revenue for the respective deliverables aswhen they are delivered.
Subscription contracts have standalone value as we sellboth capable of being distinct, whereby the subscriptions separately. In determining whether professionalcustomer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services can beis separately identifiable from other promises in the contract. If these criteria are not met, the promised services are accounted for separately from subscription services, we consider the availability of the professional services from other vendors, the nature of our professional services and whether we sell our applications to new customers without professional services. In the years ended December 31, 2017, 2016 and 2015, we determined that we had established standalone value for our professional services. This determination was made due primarily to the ability of the customer to complete these tasks without assistance and the sale of services separate from the initial subscription order. Because we established standalone value for our professional services in the years ended December 31, 2017, 2016 and 2015, such service arrangements are being accounted for separately from subscription services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement considerationas a combined performance obligation. The transaction price is allocated to the identified separate units of accounting based
performance obligations on theira relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relativestandalone selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our best estimate of selling price. The amount of arrangement fee allocated is limited by contingent revenue, if any.
basis. We determine our best estimate ofthe standalone selling price for our deliverablesprices based on our overall pricing objectives, taking into consideration market conditions and entity-specific factors. We evaluate our best estimate of selling price by reviewing historical data related to sales of our deliverables, including comparing the percentages of our contract prices to our list prices. We also may consider several other data points in our evaluation,factors, including the size of our arrangements, length of term, the cloud applications sold, customer demographics and the numbers and types of users within our arrangements.
Deferred Revenue
We typically invoice our customers for subscription and support fees in advance on a quarterly, annual, two- or three-year basis, with payment due at the start of the subscription term. Unpaid invoice amounts for non-cancelable services starting in future periods are excluded fromincluded in accounts receivable and deferred revenue. Invoiced amounts are reflected as accounts receivable once we have initiated services with an offset to deferred revenue or revenue depending on whether the revenue recognition criteria have been met. Deferred revenue also includes certain deferred professional service fees that are recognized upon completion of the service. The portion of deferred revenue that we anticipate will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.
Customer Deposits
As an agreement to purchase professional services constitutes a customer option, fees received in advance of these services being performed are considered customer deposits and are included in accrued expenses and other current liabilities on the consolidated balance sheets. Unpaid invoice amounts for these professional services starting in future periods are excluded from accounts receivable and accrued expenses and other current liabilities.
Cost of Revenue
Cost of revenue consists primarily of personnel and related costs directly associated with the professional services and customer success teams and training personnel, including salaries, benefits, bonuses, and stock-based compensation; the costs of contracted third-party vendors; the costs of server usage by our customers; information technology costs; and facility costs.
Sales and Marketing Expenses and Deferred Commissions
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included in this expense are marketing and promotional events, our annual user conference, online marketing, product marketing, information technology costs, and facility costs. We amortize sales commissions that are directly attributable to a contract over the lesser of 12 months or the non-cancelable term of the customer contract based on the terms of our commission arrangements.
Advertising costs are charged to sales and marketing expense as incurred. Advertising expense totaled $2.7$2.9 million, $2.7 million and $2.8$2.7 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, and stock-based compensation, costs of server usage by our developers, information technology costs, and facility costs.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and related costs for our executive, finance, legal, human resources, and administrative personnel, including salaries, benefits, bonuses, and stock-based compensation; legal, accounting, and other professional service fees; other corporate expenses; information technology costs; and facility costs.
Leases
We categorize leases at their inception as either operating or capital leases and may receive renewal or expansion options, rent holidays, and leasehold improvement and other incentives on certain lease agreements. We recognize lease costs on a straight-line basis, taking into account adjustments for free or escalating rental payments, renewals at our option that are reasonably assured and deferred payment terms. Additionally, lease incentives are accounted for as a reduction of lease costs over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the shorter of their useful life or the term of the lease.
Government Grants
Government grants received are recorded as a liability on the balance sheetsheets until all contingencies are resolved and the grant is determined to be realized.
Intangible Assets
We account for intangible assets under Accounting Standards Codification (ASC) 350, Goodwill and Other.Other. Intangible assets consist of legal fees incurred for patents and are recorded at cost and amortized over the useful lives of the assets of ten years, using the straight-line method. Certain patents are in the legal application process and therefore are not currently being amortized.
Accumulated amortization of patents as of December 31, 20172018 and 20162017 was approximately $218,000$320,000 and $127,000,$218,000, respectively. Future amortization expense for legally approved patents is estimated at $94,000$113,000 per year through 2022, $96,000 in 2023 and approximately $211,000$217,000 thereafter.
Impairment of Long-Lived Assets
Long-lived assets, such as property, equipment, 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.
Stock-Based Compensation
We measure all share-based payments, including grants of options to purchase common stock and the issuance of restricted stock or restricted stock units to employees, service providers and board members, using a fair-value based method. We record forfeitures as they occur. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date or reporting date, if required to be remeasured, and amortized on a straight-line basis over the requisite service period. We use the Black-Scholes option-pricing model to determine the fair values of stock option awards. For restricted stock and restricted stock units, fair value is based on the closing price of our common stock on the grant date.
Income Taxes
We record current income taxes based on our estimates of current taxable income and provide for deferred income taxes to reflect estimated future income tax payments and receipts. We are subject to U.S. federal income taxes as well as state taxes. In addition, we are subject to taxes in the foreign jurisdictions where we operate.
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment rate.
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makesmade widespread changes to the Internal Revenue Code, including, among other items, the introduction of a new international "Global“Global Intangible Low-Taxed Income" ("GILTI"Income” (“GILTI”) regime effective January 1, 2018. Companies may adopt one of two views in regards to establishing deferred taxes in accordance with the new ("GILTI"(“GILTI”) regime under ASC 740. Companies may account for the effects of GILTI either (1) in the period the entity becomes subject to GILTI, or (2) establish deferred taxes (similar to the guidance that currently exists with respect to basis differences that will reverse under current Subpart F rules) for basis differences that upon reversal will be subject to GILTI. We have elected to account for GILTI in the period we become subject to GILTI.incurred.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an
adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740, Income Taxes,, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statementstatements of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.sheets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. We regularly review our receivables that remain outstanding past their applicable payment terms and established an allowance for potential write-offs by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Accounts receivable deemed uncollectible are charged against the allowance once collection efforts have been exhausted.
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 either to 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. We adopted this standard effective January 1, 2017. 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
In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition - Revenue from Contracts with Customers (ASU(ASU 2014-09), which amends the guidance in former ASC 605, Revenue Recognition. The core principle of ASC 606 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 adopted this guidance as ofEffective January 1, 2018, utilizingwe adopted ASU 2014-09 using the modified retrospective transition method only with respectapplied to those contracts thatwhich were not completed as of January 1, 2018. This transition adjustment will be recordedWe recognized the cumulative effect of initially applying the new revenue standard as a one-time decrease to the opening balance of our accumulated deficit as of January 1, 2018 and will be comprised of the following revenue and cost items.
The adoption of ASC 606 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 will 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. We have determined that certain of our professional service agreements do not contain a material right and are only accounted for in accordance with ASC 606 when the customer exercises its option to purchase additional goods or services. In the case of agreements where we have determined that the 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 ASC 606 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 ASC 606 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. 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. We elected to apply this guidance to the incremental costs related to open contracts as of January 1, 2018. We expect to record a $5.3 million adjustment to the opening balance of our accumulated deficitdeficit. The comparative information has not been restated and continues to capitalize additional costs of obtaining a contract as of January 1, 2018.be reported under the accounting standards in effect for those periods.
Under ASC 606, in addition to recordingThe primary impact on accounts receivables and deferred revenue whenof adopting the related cash payments are received for noncancellable services, we will recordnew standard relates to recording deferred revenue when payments are due in advance of our performance of those services. We expect this change will resultsubscription based contracts. This recording has resulted in an offsetting increase in accounts receivable and deferred revenue.
InThe effect of adopting the fourth quarternew standard on accrued expenses and other current liabilities relates to the reclassification of amounts collected in advance related to the purchase of professional services from deferred revenue to accrued expenses and other current liabilities as these agreements to purchase professional services constitute a customer option.
The primary impact of adopting the new standard on sales and marketing expense relates to the deferral of incremental commission costs of obtaining subscription contracts. Under the previous guidance, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the lesser of 12 months or the non-cancelable term of the customer contract based on the terms of our commission arrangements. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line basis over a period of benefit that we have determined to be three years.
The adoption of ASC 606 primarily resulted in an acceleration of revenue as of December 31, 2017, which in turn reduced our existing deferred tax asset for amounts that had previously been included in deferred revenue. Additionally, the amortization of the costs of obtaining a contract has generated additional deferred tax liabilities that ultimately reduced our net deferred tax asset position. As we substantially completedhave provided a full valuation allowance against our project plannet deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this aggregate impact was offset by a corresponding reduction to apply the necessaryvaluation allowance.
The cumulative effect of the changes made to accounting processes, procedures, systems and internal controls, and we plan to finalize our transition adjustment underconsolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 inwere as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | Adjustments Due to ASU 2014-09 | | As of January 1, 2018 |
Assets | | | | | |
Accounts receivable, net | $ | 28,800 | | $ | 16,900 | | $ | 45,700 |
Deferred commissions | 2,376 | | 650 | | 3,026 |
Deferred commissions, non-current | — | | 4,655 | | 4,655 |
| | | | | |
Liabilities | | | | | |
Accrued expenses and other current liabilities | 20,429 | | 6,956 | | 27,385 |
Deferred revenue | 104,684 | | 6,625 | | 111,309 |
Deferred revenue, non-current | 22,709 | | 243 | | 22,952 |
| | | | | |
Equity | | | | | |
Accumulated deficit | $ | (265,337) | | $ | 8,381 | | $ | (256,956) |
In accordance with the first quarter of 2018.
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. Thenew revenue standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. We plan to adopt this guidance on the effective date. We are currently evaluatingrequirements, the impact the provisions will haveof adoption on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statementbalance sheet as of Cash Flows (Topic 230): Restricted Cash. This ASU requires that companies include amounts generally described as restricted cashDecember 31, 2018 and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The ASU is effectiveoperations for annual reporting periods beginning afterthe year ended December 15, 2017 and interim periods within those annual periods. We are adopting this guidance31, 2018 was as of the effective date. follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| As of December 31, 2018 | | | | |
| As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
Assets | | | | | |
Accounts receivable, net | 65,107 | | 37,528 | | 27,579 |
Deferred commissions | 8,178 | | 4,593 | | 3,585 |
Deferred commissions, non-current | 10,569 | | — | | 10,569 |
| | | | | |
Liabilities | | | | | |
Accrued expenses and other current liabilities | 36,353 | | 28,958 | | 7,395 |
Deferred revenue | 148,545 | | 134,793 | | 13,752 |
Deferred revenue, non-current | 25,171 | | 20,853 | | 4,318 |
| | | | | |
Equity | | | | | |
Accumulated deficit | (307,027) | | (323,295) | | 16,268 |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 | | | | |
| As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
Revenues | | | | | |
Subscription and support | $ | 200,392 | | $ | 199,575 | | $ | 817 |
Professional services | 43,952 | | 45,707 | | (1,755) |
| | | | | |
Operating expenses | | | | | |
Sales and marketing | 90,337 | | 99,162 | | (8,825) |
| | | | | |
Net loss | $ | (50,071) | | $ | (57,958) | | $ | 7,887 |
| | | | | |
Net loss per common share | | | | | |
Basic and diluted | $ | (1.15) | | $ | (1.33) | | $ | 0.18 |
The adoption of this guidance is not expected to have a materialASC 606 had no impact on our consolidated financial statements.total cash flows from operations.
In May 2017, the FASB issued ASU 2017-09, Compensation – - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. EarlyEffective January 1, 2018, we adopted this standard. The adoption is permitted. We are adoptingof this guidance as of the effective date. The implementation of this standard isdid not expected to have a significantmaterial impact on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for nonemployee share-based payment transactions. Under the new guidance, equity-classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to remeasure the awards through performance completion date. Awards that include performance conditions will recognize compensation cost when the achievement of the performance condition is probable, rather than upon achievement of the performance condition. Finally, the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted, including interim periods, but no earlier than the adoption of ASC 606. Effective June 20, 2018, we adopted this standard. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in former ASC 840, Leases, to increase transparency and comparability among organizations by requiring recognition of right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements (with the exception of short-term leases). The standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to adopt this guidance on January 1, 2019 using this new transition guidance.
We currently expect 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.
In the fourth quarter of 2018, we substantially completed our project plan to apply the necessary changes to accounting processes, procedures and internal controls, and we plan to finalize our transition adjustment under ASC 842 in the first quarter of 2019. We expect the adoption will result in the addition of approximately $16.0 million of assets and liabilities to our consolidated balance sheet, with no significant changes to our consolidated statements of operations or cash flows.
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 rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. 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.
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 on the effective date. We are currently evaluating the impacts that adoption of this ASU will have on our consolidated financial statements.
2. Cash Equivalents and Marketable Securities
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 |
At December 31, 2017, marketable securities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
U.S. treasury debt securities | | $ | 3,083 | | $ | — | | $ | (8) | | $ | 3,075 |
U.S. corporate debt securities | | 13,350 | | — | | (61) | | 13,289 |
Money market funds | | 49,452 | | — | | — | | 49,452 |
| | $ | 65,885 | | $ | — | | $ | (69) | | $ | 65,816 |
Included in cash and cash equivalents | | $ | 49,452 | | $ | — | | $ | — | | $ | 49,452 |
Included in marketable securities | | $ | 16,433 | | $ | — | | $ | (69) | | $ | 16,364 |
At December 31, 2016, marketable securities consisted of the following (in thousands):
| | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Aggregate Fair Value |
Money market funds | | Money market funds | | $ | 49,452 | | $ | — | | $ | — | | $ | 49,452 |
U.S. treasury debt securities | U.S. treasury debt securities | | $ | 3,503 | | $ | — | | $ | (5) | | $ | 3,498 | U.S. treasury debt securities | | 3,083 | | — | | (8) | | 3,075 |
U.S. corporate debt securities | U.S. corporate debt securities | | 7,943 | | 1 | | (7) | | 7,937 | U.S. corporate debt securities | | 13,350 | | — | | (61) | | 13,289 |
Money market funds | | 43,496 | | — | | — | | 43,496 | |
| | $ | 54,942 | | $ | 1 | | $ | (12) | | $ | 54,931 | | $ | 65,885 | | $ | — | | $ | (69) | | $ | 65,816 |
Included in cash and cash equivalents | Included in cash and cash equivalents | | $ | 43,496 | | $ | — | | $ | — | | $ | 43,496 | Included in cash and cash equivalents | | $ | 49,452 | | $ | — | | $ | — | | $ | 49,452 |
Included in marketable securities | Included in marketable securities | | $ | 11,446 | | $ | 1 | | $ | (12) | | $ | 11,435 | Included in marketable securities | | $ | 16,433 | | $ | — | | $ | (69) | | $ | 16,364 |
The following table presents gross unrealized losses and fair values for those marketable securities that were in an unrealized loss position as of December 31, 2017,2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 | | | | | | |
| | Less than 12 months | | | | 12 months or greater | | |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. treasury debt securities | | $ | — | | $ | — | | $ | 998 | | $ | (1) |
U.S. corporate debt securities | | 3,481 | | (5) | | 7,342 | | (62) |
Total | | $ | 3,481 | | $ | (5) | | $ | 8,340 | | $ | (63) |
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | Less than 12 months | | 12 months or greater |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. treasury debt securities | | $ | 1,976 | | $ | (7) | | $ | 1,099 | | $ | (1) |
U.S. corporate debt securities | | 13,289 | | (61) | | — | | — |
Total | | $ | 15,265 | | $ | (68) | | $ | 1,099 | | $ | (1) |
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 December 31, 20172018 to hold these investments until the cost basis is recovered.
3. Supplemental Consolidated Balance Sheet and Statement of Operations Information
Property and Equipment, net
Property and equipment, net as of December 31, 20172018 and 20162017 consisted of (in thousands):
| | | As of December 31, | | As of December 31, | |
| | 2017 | | 2016 | | 2018 | | 2017 |
Buildings | Buildings | $ | 36,608 | | $ | 36,603 | Buildings | $ | 36,608 | | $ | 36,608 |
Computers, equipment and software | Computers, equipment and software | 6,277 | | 5,954 | Computers, equipment and software | 6,602 | | 6,277 |
Furniture and fixtures | Furniture and fixtures | 8,428 | | 8,283 | Furniture and fixtures | 8,839 | | 8,428 |
Vehicles | Vehicles | 97 | | 97 | Vehicles | 97 | | 97 |
Leasehold improvements | Leasehold improvements | 4,669 | | 4,682 | Leasehold improvements | 7,678 | | 4,669 |
Construction in process | | Construction in process | 15 | | — |
| | 56,079 | | 55,619 | | 59,839 | | 56,079 |
Less: accumulated depreciation and amortization | Less: accumulated depreciation and amortization | (15,635) | | (13,029) | Less: accumulated depreciation and amortization | (18,371) | | (15,635) |
| | $ | 40,444 | | $ | 42,590 | | $ | 41,468 | | $ | 40,444 |
The following assets included in property and equipment, net were acquired under capital and financing leases (see Note 5)6) (in thousands):
| | | As of December 31, | | As of December 31, | |
| | 2017 | | 2016 | | 2018 | | 2017 |
Buildings | Buildings | $ | 36,608 | | $ | 36,603 | Buildings | $ | 36,608 | | $ | 36,608 |
Computers and equipment | Computers and equipment | 666 | | 1,747 | Computers and equipment | — | | 666 |
| | 37,274 | | 38,350 | | 36,608 | | 37,274 |
Less: accumulated amortization | Less: accumulated amortization | (5,891) | | (5,134) | Less: accumulated amortization | (6,237) | | (5,891) |
| | $ | 31,383 | | $ | 33,216 | | $ | 30,371 | | $ | 31,383 |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 20172018 and 20162017 consisted of (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Accrued vacation | $ | 6,087 | | $ | 4,368 |
Accrued commissions | 3,297 | | 2,382 |
Accrued bonuses | 4,419 | | 8,927 |
Estimated health insurance claims | 1,090 | | 1,210 |
ESPP employee contributions | 1,419 | | — |
Accrued other liabilities | 3,900 | | 3,808 |
| $ | 20,212 | | $ | 20,695 |
| | | | | | | | | | | |
| As of December 31, | | |
| 2018 | | 2017 |
Accrued vacation | $ | 6,906 | | $ | 6,087 |
Accrued commissions | 7,265 | | 3,297 |
Accrued bonuses | 5,643 | | 4,419 |
Estimated health insurance claims | 1,100 | | 1,090 |
ESPP employee contributions | 2,156 | | 1,419 |
Customer deposits | 7,395 | | — |
Accrued other liabilities | 5,888 | | 4,117 |
| $ | 36,353 | | $ | 20,429 |
Other Income, net
Other income, net for the years ended December 31, 2018, 2017 2016 and 20152016 consisted of (in thousands):
| | | For the year ended December 31, | | For the year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
Interest income | Interest income | $ | 586 | | $ | 286 | | $ | 151 | Interest income | $ | 1,278 | | $ | 586 | | $ | 286 |
Recognition of IEDA government grant | — | | — | | 1,638 | |
Income from training reimbursement program | Income from training reimbursement program | 1,578 | | 1,141 | | 744 | Income from training reimbursement program | — | | 1,578 | | 1,141 |
(Losses) gains on foreign currency transactions | (372) | | 67 | | (293) | |
Gains (losses) on foreign currency transactions | | Gains (losses) on foreign currency transactions | 289 | | (372) | | 67 |
Other | Other | (9) | | 6 | | 62 | Other | 224 | | (9) | | 6 |
| | $ | 1,783 | | $ | 1,500 | | $ | 2,302 | | $ | 1,791 | | $ | 1,783 | | $ | 1,500 |
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 December 31, 20172018 and 2016,2017, 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 December 31, 2017 | | Fair Value Measurements as of December 31, 2016 | | Fair Value Measurements as of December 31, 2018 | | | Fair Value Measurements as of December 31, 2017 | |
Description | Description | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | Description | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
Money market funds | Money market funds | | $ | 49,452 | | $ | 49,452 | | $ | — | | $ | 43,496 | | $ | 43,496 | | $ | — | Money market funds | | $ | 52,068 | | $ | 52,068 | | $ | — | | $ | 49,452 | | $ | 49,452 | | $ | — |
Commercial paper | | Commercial paper | | 7,448 | | — | | 7,448 | | — | | — | | — |
U.S. treasury debt securities | U.S. treasury debt securities | | 3,075 | | — | | 3,075 | | 3,498 | | — | | 3,498 | U.S. treasury debt securities | | 2,493 | | — | | 2,493 | | 3,075 | | — | | 3,075 |
U.S. corporate debt securities | U.S. corporate debt securities | | 13,289 | | — | | 13,289 | | 7,937 | | — | | 7,937 | U.S. corporate debt securities | | 10,823 | | — | | 10,823 | | 13,289 | | — | | 13,289 |
| | $ | 65,816 | | $ | 49,452 | | $ | 16,364 | | $ | 54,931 | | $ | 43,496 | | $ | 11,435 | | $ | 72,832 | | $ | 52,068 | | $ | 20,764 | | $ | 65,816 | | $ | 49,452 | | $ | 16,364 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Included in cash and cash equivalents | Included in cash and cash equivalents | | $ | 49,452 | | $ | 43,496 | | Included in cash and cash equivalents | | $ | 52,068 | | $ | 49,452 | |
Included in marketable securities | Included in marketable securities | | $ | 16,364 | | $ | 11,435 | | Included in marketable securities | | $ | 20,764 | | $ | 16,364 | |
5. Deferred Costs
Deferred costs, which primarily consist of costs to obtain contracts with customers, were $18.7 million as of December 31, 2018. Amortization expense for the deferred costs was $10.1 million for the year ended December 31, 2018. There was no significant impairment loss in relation to the costs capitalized for the period presented.
6. Commitments and Contingencies
Lease Commitments
We lease certain office and residential space under non-cancelable operating leases with various lease terms through June 2043. Rent expense for the years ended December 31, 2018, 2017 and 2016 and 2015 was $5.6 million, $4.7 million and $3.9 million, and $3.7 million, respectively.
In January 2018, we signed a new lease for approximately 30,000 square feet that will replace our existing offices in Denver and Boulder. The aggregate annual payments under the new lease will be approximately $1.0 million and are subject to annual increases over the lease term, which expires in February 2029.
We lease computer equipment under capital lease agreements that expire through September 2018. The total amount financed under these capital leases was $0.5 million during the year ended December 31, 2015. No new assets were financed under capital leases during the years ended December 31, 2017 and 2016.
Build to Suit
We entered into a lease agreement for land and an office building in Ames, Iowa, which was constructed in two phases. As part of the lease agreement, the landlord was responsible for constructing the building in accordance with our specifications and agreed to fund $11.8 million for the first phase and $11.1 millionfor the second phase of construction. We were the developer of the project and responsible for construction costs in excess of these amounts. As a result of this involvement, we were deemed the “owner” for accounting purposes during the construction period and were required to capitalize the construction costs associated with the office building. Upon completion of each phase of the project, we performed a sale-leaseback analysis pursuant to ASC 840, Leases, to determine if the building could be removed from the balance sheet. We determined there was continuing involvement, which precluded derecognition of the building. The construction liability of $11.8 million was reclassified to a financing obligation, and $17.1 million of costs capitalized during construction was placed in service during June 2013 for the initial phase. Upon completion of the second phase of the project, the construction liability of $11.1 million was reclassified to a financing obligation, and $19.9 million of costs capitalized during construction was placed in service during 2014.
Total cash payments due under the arrangement were allocated on a relative fair value basis between rent related to the land lease and debt service payments related to the financing obligation. The portion of the lease payments allocated to the land is expensed on a straight-line basis over the term of the lease from the point we took possession of the land and including renewal periods where renewal was deemed reasonably assured at the inception of the lease. The lease contains purchase options to acquire
the landlord’s interest in the land lease and building at any time beginning three years from the commencement date of the lease. In addition, the lease requires us upon certain events, such as a change in control, to purchase the building from the landlord. The purchase options were deemed to be fair value at the inception of the lease.
As of December 31, 2017,2018, future estimated minimum lease payments under non-cancelable operating capital and financing leases were as follows (in thousands):
| | | Operating Leases | | Capital Leases | | Financing Obligations | | Operating Leases | | Financing Obligations |
2018 | | $ | 3,659 | | $ | 66 | | $ | 2,792 | |
2019 | 2019 | | 2,630 | | — | | 2,792 | 2019 | | $ | 4,755 | | $ | 2,893 |
2020 | 2020 | | 2,235 | | — | | 2,792 | 2020 | | 3,723 | | 2,893 |
2021 | 2021 | | 2,187 | | — | | 2,792 | 2021 | | 3,640 | | 2,893 |
2022 | 2022 | | 1,887 | | — | | 2,564 | 2022 | | 3,363 | | 2,655 |
2023 | | 2023 | | 3,029 | | 1,471 |
Thereafter | Thereafter | | 6,246 | | — | | 25,650 | Thereafter | | 10,693 | | 24,868 |
Total minimum lease payments | Total minimum lease payments | | $ | 18,844 | | 66 | | 39,382 | Total minimum lease payments | | $ | 29,203 | | 37,673 |
Less: Amount representing interest | Less: Amount representing interest | | | | (2) | | (19,853) | Less: Amount representing interest | | | | (19,243) |
Present value of capital lease and financing obligations | | | $ | 64 | | $ | 19,529 | |
Present value of financing obligations | | Present value of financing obligations | | $ | 18,430 |
Government Grants
Since 2009, we have participated in a program with a local area community college, enlisted by the state of Iowa, that provides reimbursement of training dollars spent on employees hired in Iowa. The community college funds training through the sale of certificates for the amount of anticipated training expenses to be incurred and an estimate of the costs to administer the program. At each payroll date, the state allows us to divertdirect a specified portion of employee state income tax withholdings for the qualified employees to the community college. The community college uses the funds to pay for the program and principal and interest on the certificates. In the event that the funds generated from withholding taxes are insufficient to pay the principal and interest on the certificates, we would be liable for any shortfall. To date, we have entered into five agreements under this program. In addition, we have been reimbursed for training costs incurred for a total of 410 employees.
During the years ended December 31, 2017, 2016 and 2015, we were reimbursed $52,000, $83,000 and $0, respectively. We have concluded that the realization of these amounts received under this program is contingent on continuing employment levels. Therefore, in accordance with ASC 450, the amounts received are recorded on the balance sheet as a liability until all contingencies have been resolved. We release the liability to “Other income, net” on our statement of operations once the amounts diverted and paid to the community college have reduced the total principal and interest due on the certificates to a level below the amounts reimbursed to date. The amount recognized in other income is measured as the excess of the reimbursements received as of each balance sheet date over the total principal and interest due on the certificates, net of amounts diverted. To the extent we have not diverted amounts sufficient to reduce the principal and interest on the certificates to a level below the reimbursements received for each of the programs, there is no benefit recorded in the statement of operations.
During the years ended December 31, 2018, 2017 2016 and 2015,2016, the total benefit recorded on the statement of operations was $0.2 million, $1.6 million $1.0 million and $744,000, respectively. At December 31, 2017 and 2016, there was $261,000 and $1.8 million included in “Deferred government grant obligation” on the consolidated balance sheet, respectively. The deferred liability is classified as current or non-current based on the estimated timing of when the amounts will be recorded as income. At December 31, 2017 and 2016, there was $217,000 and $1.0 million, classified as a current liability, respectively.
In February 2011, we received financing from the Iowa Economic Development Authority (IEDA) that provided for a grant in the form of a forgivable loan totaling $2.3 million. In December 2015, after completing the project close out procedures, IEDA determined that 10 of the 251 positions originally hired under this grant did not meet minimum wage requirements resulting in a repayment of $88,000. The remaining balance under the forgivable loan portion of this government grant of $2.2 million was recognized during the fourth quarter of 2015, with $608,000 recorded as a reduction of our property and equipment and $1.6 million included in “Other income, net” on the consolidated statement of operations. At December 31, 2017 and 2016, there were no amounts outstanding related to the forgivable loan included in “Deferred government grant obligation” on the consolidated balance sheet.
Other Purchase Commitments
In November 2017, we entered into an agreement with a third party provider of cloud infrastructure services for a period of two years beginning December 1, 2017. The agreement provides thatAs of December 31, 2018, we are committed to pay $4.1 million and $4.8$2.7 million during the years ended December 31, 2018 and 2019, respectively.next 12 months.
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.
6.7. Debt
Other Long-Term Debt
In August 2014, we entered into a $15.0 million credit facility with Silicon Valley Bank, which was subsequently amended. The credit facility can be used to fund working capital and general business requirements and matures in August 2018.2020. The credit facility is secured by all of our assets, has first priority over our other debt obligations, and requires us to maintain certain financial covenants, including the maintenance of at least $5.0 million of cash on hand or unused borrowing capacity. The credit facility contains certain restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, experience changes in management and enter into new businesses. The credit facility has a variable interest rate equal to the bank’s prime lending rate with interest payable monthly and the principal balance due at maturity. The credit facility’s interest rate was 4.5%5.5% at December 31, 2017.2018. We recorded no interest expense for the years ended December 31, 2018, 2017 2016 and 20152016 related to such debt agreement.
In November 2018, we issued a letter of credit for $0.5 million as a security deposit for new office space. The issuance of the letter of credit reduced the borrowing capacity under our line of credit to approximately $14.5 million. No other amounts were outstanding under the credit facility as of December 31, 20172018 and 2016.
2017.
7.8. Stockholders’ Equity (Deficit)
We have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of our Class A common stock and our Class B common stock are identical, except with respect to voting and conversion. Each share of our Class A common stock is entitled to one vote per share and is not convertible into any other shares of our capital stock. Each share of our Class B common stock is entitled to ten votes per share and is convertible into one share of our Class A common stock at any time. Our Class B common stock also will automatically convert into shares of our Class A common stock upon certain transfers and other events.
8.
9. 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. Prior to our corporate conversion in December 2014, awards were provided under the 2009 Unit Incentive Plan (the 2009 Plan). Immediately prior to our IPO, the 2009 Plan was amended to provide that no further awards will be issued thereunder, and our board of directors and stockholders adopted and approved our 2014 Equity Incentive Plan (the 2014 Plan and, together with the 2009 Plan, the Plans).
As of December 31, 2017,2018, awards granted under the 2009 Plan consisted of stock options and awards granted under the 2014 Plan consisted of stock options, restricted stock awards and restricted stock units. There were no other grants of any other award types under the Plans.
In June 2016 and June 2018, stockholders approved an amendmentamendments to the 2014 Plan that increased the number of shares available for grant by 3,900,000.3,900,000 and 3,000,000, respectively. As of December 31, 2017, 1,999,4152018, 3,091,981 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 July 15 and January 15 and are exercisable on or about the succeeding January 14 and July 14, respectively, of each year. As of December 31, 2017, 5,000,0002018, 4,820,623 shares of Class A common stock were available for issuance under the ESPP. No participant may purchase more than $12,500 worth of Class A common stock in a six-month offering period. The ESPP’s initial offering period began in July 2017. As of December 31, 2017, we held employee contributions of approximately $1.4 million for future purchases under the ESPP included within accrued expenses and other current liabilities on the consolidated balance sheet. Accordingly, no shares of Class A common stock had been purchased or distributed pursuant to the ESPP as of December 31, 2017.
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):
| | | Year ended December 31, | | Year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
Cost of revenue | Cost of revenue | | | | | | Cost of revenue | | | | | |
Subscription and support | Subscription and support | $ | 738 | | $ | 493 | | $ | 363 | Subscription and support | $ | 700 | | $ | 738 | | $ | 493 |
Professional services | Professional services | 465 | | 411 | | 349 | Professional services | 619 | | 465 | | 411 |
Operating expenses | Operating expenses | | Operating expenses | |
Research and development | Research and development | 2,224 | | 2,365 | | 1,924 | Research and development | 5,842 | | 2,224 | | 2,365 |
Sales and marketing | Sales and marketing | 2,983 | | 2,075 | | 1,727 | Sales and marketing | 5,416 | | 2,983 | | 2,075 |
General and administrative | General and administrative | 13,066 | | 8,903 | | 6,637 | General and administrative | 18,264 | | 13,066 | | 8,903 |
Total | Total | $ | 19,476 | | $ | 14,247 | | $ | 11,000 | Total | $ | 30,841 | | $ | 19,476 | | $ | 14,247 |
The fair value of each option grant and each share issued under the ESPP purchase right 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 Class A 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 Class A 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:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Stock Options | | | | | |
Expected term (in years) | 0.2 - 6.1 | | 6.0 - 6.1 | | 6.1 |
Risk-free interest rate | 1.5% - 2.2% | | 1.2% - 2.1% | | 1.4% - 1.9% |
Expected volatility | 23.7% - 43.8% | | 43.0% - 45.3% | | 42.4% - 47.1% |
| | | | | |
ESPP | | | | | |
Expected term (in years) | 0.5 | | — | | — |
Risk-free interest rate | 1.2% | | | —% | | | —% | |
Expected volatility | 28.5% | | | —% | | | —% | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Stock Options | | | | | |
Expected term (in years) | — | | 0.2 - 6.1 | | 6.0 - 6.1 |
Risk-free interest rate | — | | 1.5% - 2.2% | | 1.2% - 2.1% |
Expected volatility | — | | 23.7% - 43.8% | | 43.0% - 45.3% |
| | | | | |
ESPP | | | | | |
Expected term (in years) | 0.5 | | 0.5 | | — |
Risk-free interest rate | 1.8% - 2.4% | | | 1.2% | | | —% | |
Expected volatility | 22.2% - 36.4% | | | 28.5% | | | —% | |
Stock Options
The following table summarizes the option activity under the Plans for the year ended December 31, 2017:2018:
| | | Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| | | | | | | | (in thousands) | | | | | | | | (in thousands) |
Outstanding at December 31, 2016 | 7,532,455 | | $ | 12.22 | | 7.2 | | $ | 19,988 | |
Outstanding at December 31, 2017 | | Outstanding at December 31, 2017 | 8,145,777 | | $ | 13.33 | | 7.0 | | $ | 65,913 |
Granted | Granted | 2,111,253 | | 16.10 | | Granted | — | | — | |
Forfeited | Forfeited | (339,111) | | 14.93 | | Forfeited | (264,864) | | 17.22 | |
Exercised | Exercised | (1,158,820) | | 10.77 | | Exercised | (1,480,738) | | 11.25 | |
Outstanding at December 31, 2017 | 8,145,777 | | $ | 13.33 | | 7.0 | | $ | 65,913 | |
Outstanding at December 31, 2018 | | Outstanding at December 31, 2018 | 6,400,175 | | $ | 13.65 | | 6.1 | | $ | 142,340 |
| | | | | | | | |
Exercisable at December 31, 2017 | 4,607,812 | | $ | 11.49 | | 5.7 | | $ | 45,653 | |
Exercisable at December 31, 2018 | | Exercisable at December 31, 2018 | 4,905,844 | | $ | 12.88 | | 5.6 | | $ | 112,884 |
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 years ended December 31, 2018, 2017 and 2016 and 2015 was $27.5 million, $9.8 million $3.9 million and $8.4$3.9 million, respectively.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2017 2016 and 20152016 was $6.79 and $6.79, and $6.53, respectively. No options were granted during the year ended December 31, 2018. The total fair value of options vested during the years ended December 31, 2018, 2017 2016 and 20152016 was approximately $12.4 million, $10.2 million $9.3 million and $8.7$9.3 million, respectively. Total
unrecognized compensation expense of $19.7$8.3 million related to options will be recognized over a weighted-average period of 2.52.0 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 and to non-employee members of our Board of Directors with one-year cliff vesting 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 years ended December 31, 2018, 2017, 2016, and 20152016 was approximately $2.2 million, $2.7 million, and $3.3 million and $750,000 respectively.
The following table summarizes the restricted stock award activity under the Plan for the year ended December 31, 2017:2018:
| | | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
| | | | | | | | |
Unvested at December 31, 2016 | 353,335 | | $ | 13.40 | |
Unvested at December 31, 2017 | | Unvested at December 31, 2017 | 163,332 | | 13.40 |
Granted | Granted | — | | — | Granted | — | | — |
Forfeited | Forfeited | — | | — | Forfeited | — | | — |
Vested | Vested | (190,003) | | 13.40 | Vested | (163,332) | | 13.40 |
Unvested at December 31, 2017 | 163,332 | | $ | 13.40 | |
Unvested at December 31, 2018 | | Unvested at December 31, 2018 | — | | — |
|
Compensation expense associated with unvested restricted stock awards is recognized on a straight-line basis over the vesting period. At December 31, 2017,2018, there was approximately $0.2 million of totalno unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 0.1 years.awards.
Restricted Stock Units
We have granted restrictedRestricted stock units granted to our executive officers thatemployees generally vest inover a three- or four-year period in equal, annual installments from the date of grant andor with three-year cliff vesting. Restricted stock units granted to non-employee members of our Board of Directors withgenerally 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 unit awards is calculated based on the stock price on the date of grant. The total fair value of restricted stock units vested during the yearyears ended December 31, 2018 and 2017 was approximately $7.7 million and $3.6 million.million, respectively. No restricted stock units vested during the yearsyear ended December 31, 2016 or 2015.2016.
The following table summarizes the restricted stock unit activity under the Plan for the year ended December 31, 2017:2018:
| | | Number of Shares | | Weighted-Average Grant Date Fair Value | | Number of Shares | | Weighted-Average Grant Date Fair Value |
| | | | | | | | |
Unvested at December 31, 2016 | 381,952 | | $ | 15.11 | |
Unvested at December 31, 2017 | | Unvested at December 31, 2017 | 574,072 | | $ | 14.51 |
Granted | Granted | 413,792 | | 13.95 | Granted | 2,295,322 | | 24.84 |
Forfeited | Forfeited | — | | — | Forfeited | (47,733) | | 22.85 |
Vested(1) | Vested(1) | (221,672) | | 14.48 | Vested(1) | (462,400) | | 16.73 |
Unvested at December 31, 2017 | 574,072 | | $ | 14.51 | |
Unvested at December 31, 2018 | | Unvested at December 31, 2018 | 2,359,261 | | $ | 23.95 |
(1) As ofDuring the year ended December 31, 2017,2018 recipients of 191,485417,163 shares had elected to defer settlement of the vested restricted stock units in accordance with our Nonqualified Deferred Compensation Plan.Plan resulting in total deferred units of 554,621 as of December 31, 2018.
Compensation expense associated with unvested restricted stock units is recognized on a straight-line basis over the vesting period. At December 31, 2017,2018, there was approximately $5.0$41.6 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted-average period of 1.62.4 years.
Employee Stock Purchase Plan
During the year ended December 31, 2018, 179,377 shares of common stock were purchased under the ESPP at a weighted-average price of $17.93 per share, resulting in cash proceeds of $3.2 million.
Compensation expense associated with ESPP purchase rights is recognized on a straight-line basis over the vesting period. At December 31, 2017,2018, there was approximately $27,000$52,000 of total unrecognized compensation expense related to the ESPP, which is expected to be recognized over a weighted-average period of 0.030.04 years.
9.10. Accumulated Other Comprehensive Income
The following table summarizes the activity of accumulated other comprehensive income during the years ended December 31, 2018, 2017 2016 and 20152016 (in thousands):
| | | Accumulated translation adjustment | | Accumulated unrealized holding gains (losses) on available-for-sale securities | | Accumulated other comprehensive income | | Accumulated translation adjustment | | Accumulated unrealized holding gains (losses) on available-for-sale securities | | Accumulated other comprehensive income |
Balance at December 31, 2014 | | $ | 147 | | $ | — | | $ | 147 | |
Other comprehensive income (loss) | | 133 | | (39) | | 94 | |
Balance at December 31, 2015 | Balance at December 31, 2015 | | 280 | | (39) | | 241 | Balance at December 31, 2015 | | $ | 280 | | $ | (39) | | $ | 241 |
Other comprehensive income | Other comprehensive income | | 18 | | 32 | | 50 | Other comprehensive income | | 18 | | 32 | | 50 |
Balance at December 31, 2016 | Balance at December 31, 2016 | | 298 | | (7) | | 291 | Balance at December 31, 2016 | | 298 | | (7) | | 291 |
Other comprehensive loss | Other comprehensive loss | | (159) | | (60) | | (219) | Other comprehensive loss | | (159) | | (60) | | (219) |
Balance at December 31, 2017 | Balance at December 31, 2017 | | $ | 139 | | $ | (67) | | $ | 72 | Balance at December 31, 2017 | | 139 | | (67) | | 72 |
Other comprehensive income | | Other comprehensive income | | 26 | | — | | 26 |
Balance at December 31, 2018 | | Balance at December 31, 2018 | | $ | 165 | | $ | (67) | | $ | 98 |
10.
11. Segments
Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we determined we have one operating and reportable segment. During the years ended December 31, 2018, 2017 and 2016, 90.5%, 92.1% and 2015, 92.1%, 93.8% and 94.3% of our revenue, respectively, and substantially all of our long-lived assets were attributable to operations in the United States.
12. Revenue Recognition
Disaggregation of Revenue
The following table presents our revenues disaggregated by industry (in thousands). Certain amounts have been reclassified to conform with current period presentation. These reclassifications have no impact on total revenue.
| | | | | |
| For the year ended December 31, 2018 |
Information technology | $ | 31,063 |
Consumer discretionary | 28,325 |
Industrials | 28,023 |
Diversified financials | 27,335 |
Banks | 23,818 |
Healthcare | 21,672 |
Energy | 19,617 |
Other | 64,491 |
Total revenues | $ | 244,344 |
The following table presents our revenues disaggregated by type of good or service (in thousands):
| | | | | |
| For the year ended December 31, 2018 |
Subscription and support | $ | 200,392 |
XBRL professional services | 30,562 |
Other services | 13,390 |
Total revenues | $ | 244,344 |
Deferred Revenue
During the year ended December 31, 2018, we recognized $103.9 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 December 31, 2018, revenue of approximately $173.7 million is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize approximately $148.5 million of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
11.13. Income Taxes
Loss before income tax provision (benefit) consisted of the following (in thousands):
| | | For the year ended December 31, | | For the year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
United States | United States | $ | (44,246) | | $ | (43,952) | | $ | (42,788) | United States | $ | (50,268) | | $ | (44,246) | | $ | (43,952) |
Foreign | Foreign | (119) | | (1) | | (618) | Foreign | 444 | | (119) | | (1) |
Total | Total | $ | (44,365) | | $ | (43,953) | | $ | (43,406) | Total | $ | (49,824) | | $ | (44,365) | | $ | (43,953) |
The provision (benefit) for income taxes consisted of the following (in thousands):
| | | For the year ended December 31, | | For the year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
Current | Current | | | | | | Current | | | | | |
State | State | $ | 42 | | $ | 12 | | $ | 69 | State | $ | 48 | | $ | 42 | | $ | 12 |
Foreign | Foreign | 19 | | 44 | | — | Foreign | 203 | | 19 | | 44 |
Total Current | Total Current | $ | 61 | | $ | 56 | | $ | 69 | Total Current | $ | 251 | | $ | 61 | | $ | 56 |
| | | | | | | | | | | | |
Deferred | Deferred | | Deferred | |
Federal | Federal | $ | — | | $ | (32) | | $ | (76) | Federal | $ | (8) | | $ | — | | $ | (32) |
Foreign | | Foreign | 4 | | — | | — |
Total Deferred | Total Deferred | $ | — | | $ | (32) | | $ | (76) | Total Deferred | $ | (4) | | $ | — | | $ | (32) |
| | | | | | | | | | | | |
Total | Total | $ | 61 | | $ | 24 | | $ | (7) | Total | $ | 247 | | $ | 61 | | $ | 24 |
During the years ended December 31, 2018, 2017 and 2016, we recorded a federal income tax benefit of $8,000, $0, and $32,000, respectively. That benefit was primarily related to the allocation of tax expense (benefit) between continuing operations and other comprehensive income (loss) when applying the exception to the ASC 740 intraperiod tax allocation rule. Intraperiod tax allocation rules require us to allocate the provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, we must allocate the tax provision to the other categories of earnings and then record a related tax benefit in continuing operations. This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year.
The items accounting for the difference between income taxes computed at the federal statutory income tax rate and the provision for income taxes consisted of the following (in thousands):
| | | For the year ended December 31, | | For the year ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 |
Federal statutory rate | Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | Federal statutory rate | 21.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | Effect of: | | Effect of: | |
Tax benefit at federal statutory rate | Tax benefit at federal statutory rate | $ | (15,528) | | $ | (15,384) | | $ | (15,192) | Tax benefit at federal statutory rate | $ | (10,463) | | $ | (15,528) | | $ | (15,384) |
State taxes, net of federal benefit | State taxes, net of federal benefit | (1,802) | | (1,377) | | (1,833) | State taxes, net of federal benefit | (2,587) | | (1,802) | | (1,377) |
Revaluation of deferred tax items due to tax rate change (federal and state) | Revaluation of deferred tax items due to tax rate change (federal and state) | 22,880 | | — | | — | Revaluation of deferred tax items due to tax rate change (federal and state) | — | | 22,880 | | — |
Revaluation of deferred tax asset for current year net operating loss due to tax rate change | Revaluation of deferred tax asset for current year net operating loss due to tax rate change | 4,134 | | — | | — | Revaluation of deferred tax asset for current year net operating loss due to tax rate change | — | | 4,134 | | — |
Permanent differences including section 162(m) limitations, stock compensation, gain on foreign restructuring, and meals & entertainment | Permanent differences including section 162(m) limitations, stock compensation, gain on foreign restructuring, and meals & entertainment | 5,141 | | 1,292 | | 636 | Permanent differences including section 162(m) limitations, stock compensation, gain on foreign restructuring, and meals & entertainment | 2,113 | | 5,141 | | 1,292 |
Tax benefit of federal R&D credit | Tax benefit of federal R&D credit | (2,366) | | (1,781) | | (1,270) | Tax benefit of federal R&D credit | (3,289) | | (2,366) | | (1,781) |
| Recognition of excess tax benefits related to share-based payments | Recognition of excess tax benefits related to share-based payments | (3,606) | | — | | — | Recognition of excess tax benefits related to share-based payments | — | | (3,606) | | — |
Valuation allowance | Valuation allowance | (8,586) | | 17,013 | | 17,697 | Valuation allowance | 14,044 | | (8,586) | | 17,013 |
Other | Other | (206) | | 261 | | (45) | Other | 429 | | (206) | | 261 |
Total income tax provision | Total income tax provision | $ | 61 | | $ | 24 | | $ | (7) | Total income tax provision | $ | 247 | | $ | 61 | | $ | 24 |
The components of deferred tax assets and liabilities were as follows (in thousands):
| | | As of December 31, | | As of December 31, | |
| | 2017 | | 2016 | | 2018 | | 2017 |
Deferred tax assets: | Deferred tax assets: | | | | Deferred tax assets: | | | |
Property and equipment | Property and equipment | $ | 15 | | $ | 12 | Property and equipment | $ | 18 | | $ | 15 |
Accruals and reserves | Accruals and reserves | 199 | | 1,104 | Accruals and reserves | 283 | | 199 |
Deferred rent | Deferred rent | 931 | | 1,565 | Deferred rent | 1,601 | | 931 |
Compensation and benefits | Compensation and benefits | 11,973 | | 16,048 | Compensation and benefits | 13,925 | | 11,973 |
Deferred revenue | Deferred revenue | 4,762 | | 3,255 | Deferred revenue | 5,338 | | 4,762 |
Net operating loss and credits | Net operating loss and credits | 41,108 | | 45,625 | Net operating loss and credits | 51,931 | | 41,108 |
Other | Other | 167 | | 180 | Other | 701 | | 167 |
Total deferred tax assets | Total deferred tax assets | 59,155 | | 67,789 | Total deferred tax assets | 73,797 | | 59,155 |
Valuation allowance | Valuation allowance | (58,639) | | (67,225) | Valuation allowance | (72,683) | | (58,639) |
Total deferred tax assets | Total deferred tax assets | 516 | | 564 | Total deferred tax assets | 1,114 | | 516 |
Deferred tax liabilities: | Deferred tax liabilities: | | Deferred tax liabilities: | |
Property and equipment | Property and equipment | (440) | | (403) | Property and equipment | (529) | | (440) |
Other deferred tax liabilities | Other deferred tax liabilities | (76) | | (161) | Other deferred tax liabilities | (587) | | (76) |
Deferred tax liabilities | Deferred tax liabilities | (516) | | (564) | Deferred tax liabilities | (1,116) | | (516) |
Total | Total | $ | — | | $ | — | Total | $ | (2) | | $ | — |
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the "Tax“Tax Cuts and Jobs Act"Act” (the "TCJA"“TCJA”). The TCJA makesmade widespread changes to the Internal Revenue Code, including, among other items, a reduction in the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The carrying value of our deferred tax assets and liabilities is also determined byOur financial statements for the enacted U.S. corporate income tax rate. Consequently, any changes incurrent year reflect the U.S. corporate income tax rate will impact the carrying value of our deferred tax assets and liabilities. Under the new corporate income tax rate of 21%, deferred income tax assets, net have decreased by $22.9 million and the valuation allowance has decreased by $22.9 million. There was no net effecteffects of the tax reform enactmentTCJA based on the financial statements ascurrent guidance.
As of December 31, 2017.
2018, we have completed the accounting for all the impacts of the TCJA. We continue to evaluate the impacts of the TCJA and will consider additional guidance from the U.S. Treasury Department, IRS or other standard-setting bodies. FurtherHowever, no additional adjustments if any, will bewere recorded by us during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
Effective July 1, 2017, the Company completed a restructuring of its foreign operations. A newly formed holding company was set up in the United Kingdom, Workiva Holdings Limited, which will be treated as a controlled foreign corporation from a U.S. income tax perspective. The outstanding stock ownership of the existing foreign subsidiaries were contributed to Workiva Holdings Limited, effective July 1, 2017, which triggered a taxable gain for the difference in fair market value compared to the tax basis in the entities for U.S. income tax purposes. The estimated gain recorded is $13.9 million which is included as a permanent book-tax difference. The gain is expected to be fully offset by current year net operating losses.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017.2018. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, we recognized a full valuation allowance against our net US deferred tax asset at December 31, 2017,2018, because we believe it is more likely than not that these benefits will not be realized.
As of December 31, 2017,2018, we have federal and state net operating loss carryforwards of approximately $133.8$160.9 million and $101.2$126.2 million, respectively, available to reduce any future taxable income. The federal net operating loss carryforwards will expire in varying amounts between years 2034beginning in 2034. As a result of the TCJA the federal and 2037.some state net operating losses incurred after 2017 will have an indefinite carryforward. The state net operating loss carryforwards will expire in varying amounts between years 2021 and 2037.beginning in 2021. Additionally, we have total net operating loss carryforwards from international operations of $480,000$647,000 that will expire in varying amounts beginning in 2033.do not expire. We also have approximately $6.0$9.3 million of federal and $1.3$1.8 million of state tax credit carryforwards as of December 31, 2017.2018. The federal credits will expire in varying amounts between the years 2034 and 2037.2038. The state credits expire beginning in 2021.
A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):
| | | For the year ended December 31, | | For the year ended December 31, | |
| | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Unrecognized tax benefits-beginning of period | Unrecognized tax benefits-beginning of period | $ | 168 | | $ | — | Unrecognized tax benefits-beginning of period | $ | 191 | | $ | 168 | | $ | — |
Additions for tax positions related to prior year | Additions for tax positions related to prior year | — | | 168 | Additions for tax positions related to prior year | — | | — | | 168 |
Reductions for tax positions related to prior year | Reductions for tax positions related to prior year | — | | — | Reductions for tax positions related to prior year | — | | — | | — |
Foreign currency adjustments | Foreign currency adjustments | 23 | | — | Foreign currency adjustments | (9) | | 23 | | — |
Additions for tax positions related to current year | Additions for tax positions related to current year | — | | — | Additions for tax positions related to current year | — | | — | | — |
Unrecognized tax benefits-end of period | Unrecognized tax benefits-end of period | $ | 191 | | $ | 168 | Unrecognized tax benefits-end of period | $ | 182 | | $ | 191 | | $ | 168 |
We have analyzed our inventory of tax positions taken with respect to all applicable income tax issues for all open tax years. The gross unrecognized tax benefits, if recognized, would not materially affect the effective tax rate as of December 31, 2017,2018, due to the availability of net operating losses.
We do not expect our gross unrecognized tax benefits to change significantly over the next 12 months. Our policy is to classify interest and penalties associated with uncertain tax positions, if any, as a component of our income tax provision. Interest and penalties were not significant during the years ended December 31, 2018, 2017 2016 and 2015.
2016.
We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017,2018, tax years for 2014 through 2017 are subject to examination by the tax authorities.
With few exceptions, as of December 31, 2017,2018, we are no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2014.
12.14. 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 awards, and common stock issuable pursuant to the ESPP to the extent dilutive.
The net loss per share is allocated based on the contractual 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.
We consider unvested restricted stock awards granted under the 2014 Equity Incentive Plan to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares. In future periods to the extent we are profitable, we will subtract earnings allocated to these participating securities from net income to determine net income attributable to common stockholders.
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):
| | | Year ended | | Year ended | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2016 | |
| | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Numerator | Numerator | | | | | | | | | | | | Numerator | | | | | | | | | | | |
Net loss | Net loss | $ | (33,016) | | $ | (11,410) | | $ | (31,644) | | $ | (12,333) | | $ | (30,075) | | $ | (13,324) | Net loss | $ | (38,733) | | $ | (11,338) | | $ | (33,016) | | $ | (11,410) | | $ | (31,644) | | $ | (12,333) |
| | |
Denominator | Denominator | | Denominator | |
Weighted-average common shares outstanding - basic and diluted | Weighted-average common shares outstanding - basic and diluted | 30,929,899 | | 10,688,939 | | 29,265,605 | | 11,405,528 | | 27,617,350 | | 12,235,274 | Weighted-average common shares outstanding - basic and diluted | 33,758,623 | | 9,881,785 | | 30,929,899 | | 10,688,939 | | 29,265,605 | | 11,405,528 |
Basic and diluted net loss per share | Basic and diluted net loss per share | $ | (1.07) | | $ | (1.07) | | $ | (1.08) | | $ | (1.08) | | $ | (1.09) | | $ | (1.09) | Basic and diluted net loss per share | $ | (1.15) | | $ | (1.15) | | $ | (1.07) | | $ | (1.07) | | $ | (1.08) | | $ | (1.08) |
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 December 31, | | | | |
| 2018 | | 2017 | | 2016 |
Shares subject to outstanding common stock options | 6,400,175 | | 8,145,777 | | 7,532,455 |
Shares subject to unvested restricted stock awards | — | | 163,332 | | 353,335 |
Shares subject to unvested restricted stock units | 2,359,261 | | 574,072 | | 381,952 |
Shares issuable pursuant to the ESPP | 105,583 | | 85,509 | | — |
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 |
Shares subject to outstanding common stock options | 8,145,777 | | 7,532,455 | | 6,969,133 |
Shares subject to unvested restricted stock awards | 163,332 | | 353,335 | | 600,025 |
Shares issuable pursuant to the ESPP | 85,509 | | — | | — |
13.15. Unaudited Quarterly Results of Operations
The following tables set forth selected unaudited quarterly consolidated statement of operations data for each of the quarters indicated as well as the percentage of total revenue for each line item shown. The unaudited information should be read in conjunction with our financial statements and related notes included elsewhere in this report. We believe that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
| | | Three months ended | | Three months ended | |
| | Dec 31, 2017 | | Sep 30, 2017 | | Jun 30, 2017 | | Mar 31, 2017 | | Dec 31, 2016 | | Sep 30, 2016 | | Jun 30, 2016 | | Mar 31, 2016 | | Dec 31, 2018 | | Sep 30, 2018 | | Jun 30, 2018 | | Mar 31, 2018 | | Dec 31, 2017 | | Sep 30, 2017 | | Jun 30, 2017 | | Mar 31, 2017 |
| | (in thousands) | | (in thousands) | |
Revenue | Revenue | | Revenue | |
Subscription and support | Subscription and support | $ | 45,549 | | $ | 43,214 | | $ | 40,980 | | $ | 39,540 | | $ | 38,329 | | $ | 36,237 | | $ | 34,969 | | $ | 33,585 | Subscription and support | $ | 53,779 | | $ | 51,306 | | $ | 48,837 | | $ | 46,470 | | $ | 45,549 | | $ | 43,214 | | $ | 40,980 | | $ | 39,540 |
Professional services | Professional services | 8,957 | | 8,854 | | 8,411 | | 12,364 | | 8,045 | | 8,473 | | 8,042 | | 10,966 | Professional services | 10,656 | | 9,567 | | 10,293 | | 13,436 | | 8,957 | | 8,854 | | 8,411 | | 12,364 |
Total revenue | Total revenue | 54,506 | | 52,068 | | 49,391 | | 51,904 | | 46,374 | | 44,710 | | 43,011 | | 44,551 | Total revenue | 64,435 | | 60,873 | | 59,130 | | 59,906 | | 54,506 | | 52,068 | | 49,391 | | 51,904 |
Cost of revenue | Cost of revenue | | Cost of revenue | |
Subscription and support | Subscription and support | 8,779 | | 8,472 | | 7,758 | | 7,637 | | 7,244 | | 6,694 | | 7,039 | | 6,918 | Subscription and support | 8,637 | | 8,139 | | 8,637 | | 8,802 | | 8,779 | | 8,472 | | 7,758 | | 7,637 |
Professional services | Professional services | 7,310 | | 7,180 | | 6,528 | | 6,581 | | 5,964 | | 6,040 | | 5,538 | | 6,188 | Professional services | 8,757 | | 7,520 | | 7,659 | | 7,709 | | 7,310 | | 7,180 | | 6,528 | | 6,581 |
Total cost of revenue | Total cost of revenue | 16,089 | | 15,652 | | 14,286 | | 14,218 | | 13,208 | | 12,734 | | 12,577 | | 13,106 | Total cost of revenue | 17,394 | | 15,659 | | 16,296 | | 16,511 | | 16,089 | | 15,652 | | 14,286 | | 14,218 |
Gross profit | Gross profit | 38,417 | | 36,416 | | 35,105 | | 37,686 | | 33,166 | | 31,976 | | 30,434 | | 31,445 | Gross profit | 47,041 | | 45,214 | | 42,834 | | 43,395 | | 38,417 | | 36,416 | | 35,105 | | 37,686 |
Operating expenses | Operating expenses | | Operating expenses | |
Research and development | Research and development | 18,870 | | 17,527 | | 16,239 | | 15,536 | | 14,533 | | 14,342 | | 14,047 | | 14,516 | Research and development | 20,773 | | 19,984 | | 20,718 | | 20,127 | | 18,870 | | 17,527 | | 16,239 | | 15,536 |
Sales and marketing | Sales and marketing | 21,949 | | 23,712 | | 19,787 | | 18,713 | | 18,196 | | 22,354 | | 19,828 | | 20,088 | Sales and marketing | 23,011 | | 24,068 | | 22,252 | | 21,006 | | 21,949 | | 23,712 | | 19,787 | | 18,713 |
General and administrative (1) | 12,271 | | 8,959 | | 8,943 | | 9,421 | | 7,845 | | 8,015 | | 7,882 | | 8,953 | |
General and administrative (1) (2) | | General and administrative (1) (2) | 11,047 | | 11,864 | | 21,654 | | 11,768 | | 12,271 | | 8,959 | | 8,943 | | 9,421 |
Total operating expenses | Total operating expenses | 53,090 | | 50,198 | | 44,969 | | 43,670 | | 40,574 | | 44,711 | | 41,757 | | 43,557 | Total operating expenses | 54,831 | | 55,916 | | 64,624 | | 52,901 | | 53,090 | | 50,198 | | 44,969 | | 43,670 |
Loss from operations | Loss from operations | (14,673) | | (13,782) | | (9,864) | | (5,984) | | (7,408) | | (12,735) | | (11,323) | | (12,112) | Loss from operations | (7,790) | | (10,702) | | (21,790) | | (9,506) | | (14,673) | | (13,782) | | (9,864) | | (5,984) |
Interest expense | Interest expense | (451) | | (464) | | (475) | | (455) | | (455) | | (462) | | (468) | | (490) | Interest expense | (480) | | (448) | | (449) | | (450) | | (451) | | (464) | | (475) | | (455) |
Other income, net | Other income, net | 797 | | 198 | | 176 | | 612 | | 348 | | 298 | | 278 | | 576 | Other income, net | 753 | | 203 | | 492 | | 343 | | 797 | | 198 | | 176 | | 612 |
Loss before (benefit) provision for income taxes | (14,327) | | (14,048) | | (10,163) | | (5,827) | | (7,515) | | (12,899) | | (11,513) | | (12,026) | |
(Benefit) provision for income taxes | (6) | | 25 | | 33 | | 9 | | 1 | | (8) | | 12 | | 19 | |
Loss before provision (benefit) for income taxes | | Loss before provision (benefit) for income taxes | (7,517) | | (10,947) | | (21,747) | | (9,613) | | (14,327) | | (14,048) | | (10,163) | | (5,827) |
Provision (benefit) for income taxes | | Provision (benefit) for income taxes | 204 | | 17 | | 21 | | 5 | | (6) | | 25 | | 33 | | 9 |
Net loss | Net loss | $ | (14,321) | | $ | (14,073) | | $ | (10,196) | | $ | (5,836) | | $ | (7,516) | | $ | (12,891) | | $ | (11,525) | | $ | (12,045) | Net loss | $ | (7,721) | | $ | (10,964) | | $ | (21,768) | | $ | (9,618) | | $ | (14,321) | | $ | (14,073) | | $ | (10,196) | | $ | (5,836) |
Net loss per common share: | Net loss per common share: | | | | | | | | | | | | | | | | Net loss per common share: | | | | | | | | | | | | | | | |
Basic and diluted | Basic and diluted | $ | (0.34) | | $ | (0.34) | | $ | (0.25) | | $ | (0.14) | | $ | (0.18) | | $ | (0.32) | | $ | (0.28) | | $ | (0.30) | Basic and diluted | $ | (0.17) | | $ | (0.25) | | $ | (0.50) | | $ | (0.22) | | $ | (0.34) | | $ | (0.34) | | $ | (0.25) | | $ | (0.14) |
Weighted-average common shares outstanding - basic and diluted | Weighted-average common shares outstanding - basic and diluted | 42,108,764 | | 41,815,139 | | 41,429,691 | | 41,108,611 | | 40,872,772 | | 40,762,960 | | 40,593,908 | | 40,451,668 | Weighted-average common shares outstanding - basic and diluted | 44,472,672 | | 43,973,428 | | 43,234,655 | | 42,858,756 | | 42,108,764 | | 41,815,139 | | 41,429,691 | | 41,108,611 |
(1) During the fourth quarter of 2017, we recorded an additional $1.9 million to general and administrative expense due to certain severance arrangements.
(2) During the second quarter of 2018, we recorded an additional $5.9 million and $3.6 million of cash-based and equity-based compensation, respectively, to general and administrative expense pursuant to a separation agreement with our former CEO.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Our disclosure controls and procedures are intended to provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Based on that assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 20172018 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K, and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
In October 2017,During the quarter ended December 31, 2018, we implemented a new financial accounting module to our accounting system to support revenue recognition in accordance with ASC 606. In addition, we have made enhancements and modifications to existing internal controls and procedures to ensure compliance with the new guidance.leasing guidance in accordance with ASC 842. These changes to our control environment were substantially completed in the fourth quarter of 2017.
Other than the itemsitem noted above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 20172018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Item 9B. Other Information
Employment Agreements
On February 19, 2018, we entered into executive employment agreements with Scott Ryan, Executive Vice President, Global Sales, and Mithun Banarjee, Executive Vice President, Global Operations. These agreements provide for at-will employment and include an initial base salary, an indication of eligibility for an annual cash incentive award opportunity, and equity awards at the discretion of our board of directors. These agreements also contain restrictions on non-competition and non-solicitation for the six-month period following termination. In addition, each of Messrs. Ryan and Banarjee has executed our standard confidential information and invention assignment agreement.
The employment agreements with Messrs. Ryan and Banarjee provide that certain payments and benefits would be due upon a termination of employment or a change in control.
If the employment of either Mr. Ryan or Mr. Banarjee is terminated by us for “cause” or by him without “good reason,” we will pay him (i) accrued but unpaid salary and benefits and (ii) any earned but unpaid bonus from the prior year.
If the employment of either Mr. Ryan or Mr. Banarjee is terminated due to his death or disability we will pay to him (i) accrued but unpaid salary and benefits, (ii) any earned but unpaid bonus from the prior year, (iii) a pro-rated bonus for the current year and (iv) a lump-sum payment equal to his annual base salary plus his target bonus for the current year.
If the employment of either Mr. Ryan or Mr. Banarjee is terminated by us without cause or by him for good reason, we will pay to him (i) accrued but unpaid salary and benefits, (ii) any earned but unpaid bonus from the prior year, (iii) a pro-rated bonus for the current year and (iv) a severance payment equal to two times his annual base salary plus his target bonus for the current year. In addition, the vesting of his outstanding equity awards will be accelerated, and he will be released from his non-competition and non-solicitation restrictions.
If the employment of either Mr. Ryan or Mr. Banarjee is terminated by us without cause or by him for good reason in the three months prior to or twelve months following a change in control, we will pay to him (i) accrued but unpaid salary and benefits, (ii) any earned but unpaid bonus from the prior year, (iii) his target bonus for the year in which the termination occurs (or if greater, the year in which the change in control occurs) and (iv) a severance payment equal to three times his annual base salary plus target bonus. In addition, the vesting of his outstanding equity awards will be accelerated, and he will be released from his non-competition and non-solicitation restrictions.
Short-Term Incentive Plan
On February 16, 2018,15, 2019, the Compensation Committee of our Board of Directors approved the 20182019 Short-Term Incentive Plan applicable to our executive officers for the fiscal year ending December 31, 2018.2019. The Plan provides executive officers with the opportunity to earn cash bonuses based upon the achievement of pre-established performance metrics determined by the Committee, which may include one or more of revenue growth, operating cash flow, or operating loss excluding stock compensation. The Committee sets the target award for each participating executive as a percentage of base salary. Following the end of fiscal 2018,2019, the Committee will review our attainment of the metrics and determine actual payouts, subject to upward or downward adjustment in its discretion.
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
a) Directors of the Company.
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the heading “Election of Directors” and is incorporated herein by reference.
b) Executive Officers of the Company.
Matthew M. Rizai,Martin J. Vanderploeg, Ph.D. 61,, 62, has served as our ChairmanPresident and Chief Executive Officer since December 2014 and served as the Chief Executive Officer and a Managing Director of Workiva LLC from 2009 to December 2014. He has over 20 years of experience as a Mechanical Engineer and nearly 15 years of experience leading technology companies. Prior to founding Workiva, Mr. Rizai was the Chairman and Chief Executive Officer of Engineering Animation, Inc. (NASDAQ: EAII) (EAI) from 1990 to 2000, when it was acquired by Unigraphics Solutions (now part of Siemens USA). Prior to EAI, Mr. Rizai was a senior research engineer at General Motors Research Laboratories, an analyst at Arch Development Corporation, and a development engineer at Ford Motor Company. He also co-founded Computer Aided Design Software, Inc. From 2003 to 2013, Mr. Rizai was a board member of Stafford Development Company, a real estate, hospitality, restaurant and health care services company based in Tifton, GA. Mr. Rizai earned a B.S., M.S. and Ph.D. in Mechanical Engineering from Michigan State University and an M.B.A. from the University of Chicago Booth School of Business.
Martin J. Vanderploeg, Ph.D., 61,June 2018, has served as our President and Chief Operating Officer since December 2014 and served as the Chief Operating Officer and a Managing Director of Workiva LLC from 2008 to December 2014. He has over 20 years of experience in mechanical engineering and advising early stage technology companies. Prior to founding Workiva in 2008, Mr. Vanderploeg was a founder of EAI and served as EAI’s Executive Vice President from 1993 until EAI was acquired by Unigraphics Solutions in 2000. Mr. Vanderploeg served as Chief Technology Officer of EAI from 1989 to 1999. Following the acquisition of EAI, Mr. Vanderploeg continued to be an advisor to various technology start-up companies. Prior to EAI, Mr. Vanderploeg was a tenured professor of mechanical engineering at Iowa State University from 1985 to 1993 and was the founder and director of the Iowa State University Visualization Laboratory. Mr. Vanderploeg earned a B.S., M.S. and Ph.D. in mechanical engineering from Michigan State University.
Jeffrey D. Trom, Ph.D., 57,58, has served as Executive Vice President and Chief Technology Officer since December 2014 and served as a Managing Director and Chief Technology Officer of Workiva LLC from 2008 to December 2014. He has over 20 years of experience working with information technology and development. Prior to founding Workiva, Mr. Trom was a founder of EAI and served as EAI’s Vice President from 1990 and as Chief Technology Officer in charge of software architecture, development and deployment from 1999 until EAI was acquired by Unigraphics Solutions in 2000. Thereafter, Mr. Trom served as a technical consultant for various technology companies, including Electronic Data Systems from 2000 to 2002. He is president of the board of Middle Creek Montessori, a non-profit school in Bozeman, Montana. Mr. Trom earned a B.S. and M.S. in Mechanical Engineering from University of Iowa and a Ph.D. in Mechanical Engineering from Iowa State University.
Joseph H. Howell, 65, has served as our Executive Vice President for Strategic Initiatives since December 2014 and served as a Managing Director of Workiva LLC from 2008 to December 2014. He has over 25 years of experience in senior financial management and SEC reporting experience, including with early stage companies. Prior to founding Workiva in 2008, Mr. Howell was the Managing Director of Financial Intelligence, LLC from 2007 until 2008. From 2002 to 2004, Mr. Howell served as Chief Financial Officer of Eid Passport, and, from 2000 to 2002, he was the Chief Financial Officer of
Webridge, Inc., which was acquired by Click Commerce. He was also the Chief Financial Officer from 1998 to 2000 of EMusic.com (NASDAQ: EMUS), which was acquired by Universal Music Group. In addition, Mr. Howell served as the Chief Financial Officer of Merix Corporation (NASDAQ: MERX) from 1995 to 1998, Acting Chief Financial Officer for Borland Software (NASDAQ: BORL) from 1994 to 1995, and the Chief Accounting Officer for Borland Software from 1988 to 1995. Mr. Howell is a certified public accountant (inactive), and he earned a B.A. from the University of Michigan and an M.S. in Accounting from Eastern Michigan University.
J. Stuart Miller, 57,58, has served as our Executive Vice President and Chief Financial Officer since December 2014. He also served as our Treasurer from December 2014 to June 2017 and served as Chief Financial Officer of Workiva LLC from April 2014 to December 2014. He has over 25 years of experience advising on mergers and acquisitions and capital raising for various companies. Prior to joining Workiva in April 2014, Mr. Miller was a Managing Director of Colonnade Advisors, a mergers and acquisitions advisory firm that he founded in 1999. Previously, he was a Managing Director in the Investment Banking Department of J.P. Morgan. Mr. Miller joined J.P. Morgan from Credit Suisse First Boston, where he had worked in the Investment Banking Department. He earned a B.A. from Washington & Lee University and an M.B.A. from Harvard Business School.
Troy M. Calkins, 51,52, Mr. Calkins has served as our Executive Vice President, Chief Legal and Administrative Officer and Corporate Secretary since November 2017, after previously serving as our Executive Vice President, General Counsel and Secretary since December 2014. He also served as General Counsel of Workiva LLC from February 2014 to December 2014. Prior to joining Workiva, he was a partner at Drinker Biddle & Reath LLP, where he spent 19 years in the firm’s Corporate and Securities Practice Group. His practice focused on counseling both private and public companies on legal strategy, corporate compliance and governance, and private and public securities offerings. He earned a B.A. from Michigan State University and a J.D. from the University of Michigan Law School.
Scott Ryan, 46,47, Mr. Ryan has served as our Executive Vice President and Chief Revenue Officer since August 2018, served as our Executive Vice President of Global Sales sincefrom March 2017. Previously, he2017 to August 2018, and served as our Vice President of Global Sales from August 2016 to March 2017. Prior to Workiva, Mr. Ryan was employed by IBM in various sales leadership positions from April 2005 to August 2016, most recently as the Vice President of North America Cyber Security Sales. Prior to IBM, he held software sales and leadership positions at various levels at Interwoven and SAS Institute. Mr. Ryan also served as a U.S. Army officer. He earned a B.S. in System Engineering from the U.S. Military Academy at West Point and an M.B.A. from the Darden School of Business at the University of Virginia.
Mitz Banarjee, 39,40, Mr. Banarjee has served as our Executive Vice President of Global Operationsand Chief Customer Officer since September 2017.August 2018. Previously, Mr. Banarjee served as our Executive Vice President of Global Operations from August 2017 to August 2018, Executive Vice President of Global Client Services from March to August 2017, Vice President of Global Client Services from March 2015 to March 2017 and Director of Customer First Culture from December 2014 to February 2015. He also served Workiva LLC as Director of Customer First Culture from March 2012 to December 2014 and Director of Customer Operations from March 2010 to February 2012. Prior to Workiva, Mr. Banarjee was Director of Client Services at Yodle (acquired by Web.com in 2016). Previously, he managed customer relationship teams at AT&T and AOL. He earned a B.A. in Information Systems from the University of Lincoln in England, UK.
c) Section 16(a) Beneficial Ownership Reporting Compliance.
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
d) Code of Ethics.
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the heading “Corporate Governance” and is incorporated herein by reference.
e) Information regarding our Audit Committee and Nominating and Governance Committee is set forth in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the heading “Corporate Governance” and is incorporated herein by reference.
Item 11. Executive Compensation
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the headings “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the headings “Ownership of Common Stock” and “Equity Compensation Plan Information” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the headings “Certain Relationships and Related-Party and Other Transactions” and “Corporate Governance” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
This information is included in our definitive proxy statement for the 20182019 Annual Meeting of Stockholders under the heading “Ratification of the Appointment of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
Part IV.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Form 10-K:10-K or incorporated by reference herein:
1.All financial statements. See Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
2.Financial Statement Schedules. Financial statement schedules are omitted as they are either not required or the information is otherwise included in the consolidated financial statements.
3.Exhibits:
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Exhibit Number | | Description |
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3.1 | | |
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3.2 | | Bylaws of Workiva Inc., incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 16, 2014. |
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4.1 | | |
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4.2 | | Form of senior indenture, incorporated by reference from Exhibit 4.6 to the Company’s Registration Statement on Form S-3 filed on August 3, 2017. |
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4.3 | | Form of subordinated indenture, incorporated by reference from Exhibit 4.7 to the Company’s Registration Statement on Form S-3 filed on August 3, 2017. |
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10.1* | | |
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10.2* | | |
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10.3* | | |
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10.4* | | |
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10.5* | | |
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10.6* | | Form of Employment Agreement, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017. |
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10.7* | | |
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10.8 | | |
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Exhibit Number | | Description |
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10.9 | | |
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10.10 10.1 | | |
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10.12 | | |
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10.13* | | |
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10.14* | | |
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10.15 | | |
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10.16* | | |
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10.17* | | |
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10.18 | | |
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12.1 10.19 | | |
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10.20* | | |
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10.21* | | |
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10.22* | | |
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21.1 | | |
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Exhibit Number | | Description |
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23.1 | | |
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24.1 | | Power of attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). |
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31.1 | | |
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31.2 | | |
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Exhibit Number 32.1# | | Description |
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32.1# | | |
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32.2# | | |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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* Indicates a management contract or compensatory plan.
# As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Workiva Inc. under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 22nd20th day of February, 2018.2019.
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WORKIVA INC. | |
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By: | /s/ Matthew M. Rizai,Martin J. Vanderploeg, Ph.D. |
Name: | Martin J. Vanderploeg, Ph.D. |
Name: Title: | Matthew M. Rizai, Ph.D. |
Title: | ChairmanPresident and Chief Executive Officer |
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POWER OF ATTORNEY
The undersigned officers and directors of Workiva Inc. hereby severally constitute Matthew M. RizaiMartin J. Vanderploeg our true and lawful attorney, with full power to him, to sign for us in our names in the capacities indicated below the Annual Report on Form 10-K filed herewith and any and all amendments thereto, and generally do all such things in our name and on our behalf in our capacities as officers and directors to enable Workiva Inc. to comply with the provisions of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any one of them on the Annual Report on Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
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Signature | | Title | | Date |
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/s/ Matthew M. Rizai,Martin J. Vanderploeg, Ph.D. | | Chairman of the board andPresident, Chief Executive Officer and Director
(Principal Executive Officer) | | February 22, 201820, 2019 |
Matthew M. Rizai,Martin J. Vanderploeg, Ph.D. | | | | |
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/s/ J. Stuart Miller | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 22, 201820, 2019 |
J. Stuart Miller | | | | |
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/s/ Jill Klindt | | Senior Vice President, Treasurer and Chief Accounting Officer (Principal Accounting Officer) | | February 22, 201820, 2019 |
Jill Klindt | | | | |
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/s/ Eugene S. Katz | | Director | | February 22, 201820, 2019 |
Eugene S. Katz | | | | |
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/s/ Michael M. Crow, Ph.D. | | Director | | February 22, 201820, 2019 |
Michael M. Crow, Ph.D. | | | | |
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/s/ Robert H. Herz | | Director | | | | February 20, 2019 |
Robert H. Herz | | | | |
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/s/ David S. Mulcahy | | Director | | February 20, 2019 |
David S. Mulcahy | | | | |
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/s/ Suku Radia | | Director | | February 20, 2019 |
Suku Radia | | | | |
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/s/ Robert H. HerzBrigid A. Bonner | | Director | | February 22, 201820, 2019 |
Robert H. HerzBrigid A. Bonner | | | |
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/s/ David S. Mulcahy | | Director | | February 22, 2018 |
David S. Mulcahy | | | |
| | | | |
/s/ Suku Radia | | Director | | February 22, 2018 |
Suku Radia | | | |
| | | | |
/s/ Martin J. Vanderploeg, Ph.D. | | Director | | February 22, 2018 |
Martin J. Vanderploeg, Ph.D. | | | |