Q2 HOLDINGS, INC., 10-Q filed on 8/12/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Jul. 31, 2014
Entity [Abstract]
 
 
Entity Registrant Name
Q2 HOLDINGS, INC. 
 
Entity Central Index Key
0001410384 
 
Trading Symbol
qtwo 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock Shares Outstanding
 
34,191,469 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2014 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q2 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 94,906 
$ 18,675 
Restricted cash
116 
116 
Accounts receivable, net
5,468 
9,063 
Prepaid expenses and other current assets
1,971 
1,079 
Deferred solution and other costs, current portion
3,127 
3,124 
Deferred implementation costs, current portion
1,945 
1,814 
Total current assets
107,533 
33,871 
Property and equipment, net
14,026 
14,831 
Deferred solution and other costs, net of current portion
6,291 
5,358 
Deferred implementation costs, net of current portion
4,932 
4,560 
Other long-term assets
740 
2,488 
Total assets
133,522 
61,108 
Current liabilities:
 
 
Accounts payable
1,939 
4,085 
Accrued liabilities
6,703 
11,664 
Deferred revenues, current portion
14,351 
12,728 
Capital lease obligations, current portion
513 
714 
Total current liabilities
23,506 
29,191 
Deferred revenues, net of current portion
17,947 
14,773 
Capital lease obligations, net of current portion
351 
575 
Long-term debt, net of current portion
2,054 
6,288 
Deferred rent, net of current portion
4,892 
4,444 
Other long-term liabilities
7 
101 
Total liabilities
48,757 
55,372 
Commitments and contingencies (Note 4)
   
   
Stockholders' equity (deficit):
 
 
Junior convertible preferred stock: $0.0001 par value; no shares authorized, issued or outstanding as of June 30, 2014, and 1,251 shares authorized, issued and outstanding as of December 31, 2013
0 
1,740 
Common stock: $0.0001 par value; 150,000 shares authorized, 34,093 issued and outstanding as of June 30, 2014, and 35,000 shares authorized, 8,288 shares issued and outstanding as of December 31, 2013
3 
1 
Additional paid-in capital
139,743 
6,675 
Accumulated deficit
(54,981)
(44,732)
Total stockholders' equity (deficit)
84,765 
(36,316)
Total liabilities, redeemable convertible preferred stock, redeemable common stock and stockholders' equity (deficit)
133,522 
61,108 
Series A Preferred Stock [Member]
 
 
Redeemable convertible preferred stock and redeemable common stock:
 
 
Redeemable convertible preferred stock and redeemable common stock
0 
10,815 
Series B Preferred Stock [Member]
 
 
Redeemable convertible preferred stock and redeemable common stock:
 
 
Redeemable convertible preferred stock and redeemable common stock
0 
10,915 
Series C Preferred Stock [Member]
 
 
Redeemable convertible preferred stock and redeemable common stock:
 
 
Redeemable convertible preferred stock and redeemable common stock
0 
18,995 
Common Stock [Member]
 
 
Redeemable convertible preferred stock and redeemable common stock:
 
 
Redeemable convertible preferred stock and redeemable common stock
$ 0 
$ 1,327 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2014
Dec. 31, 2013
Junior Preferred Stock, Par or Stated Value Per Share
$ 0.0001 
$ 0.0001 
Junior Preferred Stock, Shares Authorized
0 
1,251,000 
Junior Preferred Stock, Shares Issued
0 
1,251,000 
Junior Preferred Stock, Shares Outstanding
0 
1,251,000 
Common Stock, Par or Stated Value Per Share
$ 0.0001 
$ 0.0001 
Common Stock, Shares Authorized
150,000,000 
35,000,000 
Common Stock, Shares, Issued
32,907,000 
8,288,000 
Common Stock, Shares Outstanding
32,907,000 
8,288,000 
Series A Preferred Stock [Member]
 
 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Par or Stated Value Per Share
$ 0.0001 
$ 0.0001 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Authorized
0 
7,908,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Issued
0 
7,908,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Outstanding
0 
7,908,000 
Series B Preferred Stock [Member]
 
 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Par or Stated Value Per Share
$ 0.0001 
$ 0.0001 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Authorized
0 
1,818,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Issued
0 
1,818,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Outstanding
0 
1,818,000 
Series C Preferred Stock [Member]
 
 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Par or Stated Value Per Share
$ 0.0001 
$ 0.0001 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Authorized
0 
2,605,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Issued
0 
2,605,000 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Outstanding
0 
2,605,000 
Common Stock [Member]
 
 
Redeemable Convertible Preferred Stock and Redeemable Common Stock, Shares Outstanding
0 
3,829,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Income Statement [Abstract]
 
 
 
 
Revenues
$ 19,158 
$ 14,044 
$ 35,992 
$ 26,878 
Cost of revenues
10,830 1
8,408 1
21,042 
16,215 
Gross profit
8,328 
5,636 
14,950 
10,663 
Operating expenses:
 
 
 
 
Sales and marketing
6,032 1
4,138 1
11,541 
7,198 
Research and development
2,787 1
2,152 1
5,523 
4,018 
General and administrative
4,058 1
2,776 1
7,776 
5,111 
Unoccupied lease charges
0 
148 
0 
148 
Total operating expenses
12,877 
9,214 
24,840 
16,475 
Loss from operations
(4,549)
(3,578)
(9,890)
(5,812)
Other income (expense):
 
 
 
 
Interest and other income
5 
3 
5 
6 
Interest and other expense
(124)
(119)
(331)
(173)
Total other expense, net
(119)
(116)
(326)
(167)
Loss before income taxes
(4,668)
(3,694)
(10,216)
(5,979)
Provision for income taxes
(15)
(14)
(33)
(19)
Loss from continuing operations
(4,683)
(3,708)
(10,249)
(5,998)
Loss from discontinued operations, net of tax
0 
0 
0 
(199)
Net loss
$ (4,683)
$ (3,708)
$ (10,249)
$ (6,197)
Net loss per common share:
 
 
 
 
Loss from continuing operations per share, basic and diluted (dollars per share)
$ (0.14)
$ (0.31)
$ (0.42)
$ (0.51)
Loss from discontinued operations per share, basic and diluted (dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ (0.02)
Net loss per common share, basic and diluted (dollars per share)
$ (0.14)
$ (0.31)
$ (0.42)
$ (0.53)
Weighted average common shares outstanding:
 
 
 
 
Weighted-average common shares outstanding, basic and diluted (shares)
34,068 
11,901 
24,143 
11,666 
Consolidated Statements of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Stock-based compensation expenses
$ 1,068 
$ 376 
$ 1,986 
$ 710 
Cost of revenues [Member]
 
 
 
 
Stock-based compensation expenses
147 
61 
273 
122 
Sales and marketing [Member]
 
 
 
 
Stock-based compensation expenses
187 
60 
354 
99 
Research and development [Member]
 
 
 
 
Stock-based compensation expenses
122 
66 
229 
125 
General and administrative [Member]
 
 
 
 
Stock-based compensation expenses
$ 612 
$ 189 
$ 1,130 
$ 364 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities:
 
 
Net loss
$ (10,249)
$ (6,197)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
Amortization of deferred implementation, solution and other costs
2,030 
1,311 
Depreciation and amortization
2,030 
1,262 
Amortization of debt issuance costs
48 
20 
Stock-based compensation expenses
1,986 
710 
Loss from discontinued operations
0 
199 
Allowance for sales credits
51 
43 
Loss on disposal of long-lived assets
0 
18 
Unoccupied lease charge
0 
148 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
3,545 
(411)
Prepaid expenses and other current assets
(890)
(385)
Deferred solution and other costs
(1,633)
(1,339)
Deferred implementation costs
(1,836)
(1,657)
Other long-term assets
330 
(388)
Accounts payable
(1,036)
(881)
Accrued liabilities
(3,643)
1,373 
Deferred revenue
4,798 
3,551 
Deferred rent and other long-term liabilities
355 
4,053 
Net cash (used in) provided by continuing operations
(4,114)
1,430 
Net cash used in discontinued operating activities
0 
(236)
Net cash (used in) provided by operating activities
(4,114)
1,194 
Cash flows from investing activities:
 
 
Purchases of property and equipment
(2,468)
(7,468)
Acquisitions and purchase of intangible assets
0 
(125)
Cash included in distribution of spin-off
0 
(46)
Net cash used in investing activities
(2,468)
(7,639)
Cash flows from financing activities:
 
 
Proceeds from issuance of preferred stock, net of issuance costs
0 
18,995 
Proceeds from borrowings on line of credit
12,500 
6,350 
Payments on line of credit
(16,710)
(2,500)
Payments on capital lease obligations
(446)
(304)
Proceeds from the issuance of common stock, net of issuance costs
86,461 
0 
Proceeds from exercise of stock options to purchase common stock
1,008 
338 
Net cash provided by financing activities
82,813 
22,879 
Net increase in cash and cash equivalents
76,231 
16,434 
Cash and cash equivalents, beginning of period
18,675 
9,111 
Cash and cash equivalents, end of period
94,906 
25,545 
Supplemental disclosures of cash flow information:
 
 
Cash paid for taxes
55 
39 
Cash paid for interest
207 
85 
Supplemental disclosure of non-cash investing activities:
 
 
Equipment acquired under capital lease
$ 0 
$ 975 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business

Q2 Holdings, Inc., or the Company, is a leading provider of secure, cloud-based virtual banking solutions. The Company enables regional and community financial institutions, or RCFIs, to deliver a robust suite of integrated virtual banking services and more effectively engage with their retail and commercial account holders who expect to bank anytime, anywhere and on any device. The Company delivers its solutions to the substantial majority of its customers using a software-as-a-service, or SaaS, model under which its RCFI customers pay subscription fees for the use of the Company's solutions.

The Company, formerly known as CBG Holdings, Inc., was incorporated in Delaware in March 2005 and is a holding company that owns 100% of the outstanding capital stock of Q2 Software, Inc. On March 1, 2013, the Company reorganized its business operations in conjunction with the private placement of its Series C redeemable convertible preferred stock. Prior to the reorganization, the Company owned 100% of the outstanding capital stock of cbanc Network Inc., or cbanc. Pursuant to the reorganization, the Company distributed all shares of cbanc to its stockholders in a spin-off, and the Company was renamed Q2 Holdings, Inc.

The Company's headquarters are located in Austin, Texas.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

As used in this report, the terms "we," "us," or "our" refer to Q2 Holdings, Inc. and its wholly-owned subsidiary. These interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and Securities and Exchange Commission, or SEC, requirements for interim financial statements. The interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

In the Company's opinion, the accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2013, which are included in the Company's prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the SEC on March 20, 2014. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other period.

Use of Estimates

The preparation of the accompanying interim unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include stock-based compensation, the useful lives of property and equipment and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ significantly from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments acquired with an original maturity of ninety days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments.

Restricted Cash

Restricted cash consists of deposits held in a money market account for leased office space.

Fair Value of Financial Instruments

The carrying values of the Company's financial instruments, principally cash equivalents, accounts receivable, restricted cash and accounts payable, approximated their fair values due to the short period of time to maturity or repayment. The carrying values of the Company's debt instruments approximated their fair value based on rates currently available to the Company. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:

•
Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;

•
Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and

•
Level III—Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own assumptions.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

All Company assets with fair values measured on a recurring basis, which consists only of cash and cash equivalents, as of June 30, 2014 and December 31, 2013 were classified as Level 1 assets.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash and accounts receivable. The Company's cash and cash equivalents and restricted cash are placed with high credit quality financial institutions and issuers, and at times may exceed federally-insured limits. The Company has not experienced any loss relating to cash and cash equivalents or restricted cash in these accounts. The Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. No individual customer accounted for 10% or more of revenues for each of the three and six months ended June 30, 2014 and 2013. No individual customer accounted for 10% or more of accounts receivable, net, as of June 30, 2014 or December 31, 2013.

Accounts Receivable

Accounts receivable are stated at net realizable value, including both billed and unbilled receivables to customers. Unbilled receivable balances arise primarily when the Company earns revenues based on the number of registered users and the number of bill-pay and certain other transactions that registered users perform on the Company's virtual banking solutions in excess of the levels included in the Company's minimum subscription fee. Generally, billing for such revenues occurs one month in arrears.

The Company assesses the collectability of outstanding accounts receivable on an ongoing basis and maintains an allowance for doubtful accounts for accounts receivable deemed uncollectable. This allowance is recorded as a reduction against accounts receivable. As of June 30, 2014 and December 31, 2013, the Company did not provide for an allowance for doubtful accounts, as all amounts outstanding were deemed collectable. Historically, the Company's collection experience has not varied significantly, and bad debt expenses have been insignificant.

The Company maintains a reserve for estimated sales credits issued to customers for billing disputes or other service-related reasons. This allowance is recorded as a reduction against current period revenues and accounts receivable. In estimating this allowance, the Company analyzes prior periods to determine the amounts of sales credits issued to customers compared to the revenues in the period that related to the original customer invoice. This estimate is analyzed quarterly and adjusted as necessary. The allowance for sales credits was $0.2 million and $0.1 million as of June 30, 2014 and December 31, 2013, respectively.

Deferred Implementation Costs

The Company capitalizes certain personnel and other costs, such as employee salaries, benefits and the associated payroll taxes that are direct and incremental to the implementation of its solutions. The Company analyzes implementation costs that may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The Company assesses the recoverability of its deferred implementation costs by comparing the greater of the amount of the non-cancellable portion of a customer's contract and the non-refundable customer prepayments received as it relates to the specific implementation costs incurred. The Company begins amortizing the deferred implementation costs for an implementation once the revenue recognition criteria have been met, and the Company amortizes those deferred implementation costs ratably over the remaining term of the customer agreement. The portion of deferred implementation costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred implementation costs, current portion, and the remainder is recorded in long-term assets as deferred implementation costs, net of current portion.

Deferred Solution and Other Costs

The Company capitalizes sales commissions and other third-party costs, such as third party licenses and maintenance related to its customer agreements. The Company capitalizes sales commissions because the commission charges are so closely related to the revenues from the non-cancellable customer agreements that they should be recorded as an asset and charged to expense over the same period that the related revenue is recognized. The Company begins amortizing deferred solution and other costs for a particular customer agreement once the revenue recognition criteria are met, and the Company amortizes those deferred costs over the remaining term of the customer agreement. The Company analyzes solution and other costs that may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred solution and other costs, current portion, and the remainder is recorded in long-term assets as deferred solution and other costs, net of current portion. Deferred commissions were $5.7 million and $4.6 million as of June 30, 2014 and December 31, 2013, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets. Maintenance and repairs that do not extend the life of or improve an asset are expensed in the period incurred.

The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
 
3 - 5 years
Purchased software and licenses
 
3 - 5 years
Furniture and fixtures
 
7 years
Leasehold improvements
 
Lesser of estimated useful life or lease term


Deferred Revenues

Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well as initial subscription fees. The Company recognizes deferred revenues as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Deferred revenues that are expected to be recognized as revenues during the succeeding twelve month period are recorded in current liabilities as deferred revenues, current portion and the remaining portion is recorded in long-term liabilities as deferred revenues, net of current portion.

Revenues

All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions within a single operating segment. The Company derives the substantial majority of its revenues from subscription fees for the use of its solutions hosted in the Company's data centers as well as revenues for implementation and customer support services related to the Company's solutions. A small portion of the Company's customers host the Company's solutions in their own data centers under term license and maintenance agreements, and the Company recognizes the corresponding revenues ratably over the term of those customer agreements.

Revenues are recognized net of sales credits and allowances. The Company begins to recognize revenues for a customer when all of the following criteria are satisfied:

•
there is persuasive evidence of an arrangement;

•
the service has been or is being provided to the customer;

•
the collection of the fees is reasonably assured; and

•
the amount of fees to be paid by the customer is fixed or determinable.

Determining whether and when these criteria have been met can require significant judgment and estimates. In general, revenue recognition commences when the Company's solutions are implemented and made available to the customers.

The Company's software solutions are available for use in hosted application arrangements under subscription fee agreements. Subscription fees from these applications, including related customer support, are recognized ratably over the customer agreement term beginning on the date the solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the Company's revenue recognition criteria have been met.

The Company considers subscription fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within the Company's standard payment terms. In determining whether collection of subscription fees is reasonably assured, the Company considers financial and other information about customers, such as a customer's current credit-worthiness and payment history over time. Historically bad debt expenses have not been significant.

The Company enters into arrangements with multiple-deliverables that generally include multiple subscriptions and implementation services.

For multiple-deliverable arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, each deliverable must be accounted for separately. The Company's subscription services have standalone value as such services are often sold separately. In determining whether implementation services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. To date, the Company has concluded that the implementation services included in multiple-deliverable arrangements do not have standalone value. As a result, when implementation services are sold in a multiple-deliverable arrangement, the Company defers any arrangement fees for implementation services and recognizes such amounts ratably over the period of performance for the initial agreement term.

When multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence of selling price, or VSOE, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price. The amount of revenue allocated to delivered items is limited by contingent revenues.

The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company's discounting practices, the size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company's go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.

Subscription Fee Revenues

The Company's solutions are available as hosted solutions under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from a hosted solution are recognized monthly over the customer agreement term beginning on the date the Company's solution is made available to the customer. Additional fees for monthly usage above the levels included in the standard subscription fee, which include fees for transactions processed during the period, are recognized as revenue in the month when the usage amounts are determined and reported. Any revenues related to upfront implementation services are recognized ratably over the same customer agreement term. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met.

Professional Services Revenues

When professional services are not combined with subscription services or term licenses as a single unit of accounting, these professional services revenues are recognized as the services are performed. Revenues from professional services not combined with subscription services were not significant in the periods presented.

Certain out-of-pocket expenses billed to customers are recorded as revenues rather than an offset to the related expense. Revenues recorded from out-of-pocket expense reimbursements totaled approximately $0.2 million and $0.1 million during the three months ended June 30, 2014 and 2013, respectively, and were $0.3 million and $0.2 million for the six months ended June 30, 2014 and 2013, respectively. The out-of-pocket expenses are reported in cost of revenues.

Term Licenses and Maintenance Revenues

A small portion of the Company's customers host and manage the Company's solutions on-premises or in third-party data centers under term license and maintenance agreements. Term licenses sold with maintenance, which entitles the customer to technical support and upgrades and updates to the software made available on a when-and-if-available basis, are accounted for under Accounting Standards Codification 985-605, "Software Revenue Recognition." The Company does not have VSOE of fair value for the maintenance and professional services so the entire arrangement consideration is recognized monthly over the term of the software license when all of the other revenue recognition criteria have been met. Revenues from term licenses and maintenance agreements were not significant in the periods presented.

Cost of Revenues

Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, for employees providing services to the Company's customers. Costs associated with these services include the costs of the Company's implementation, customer support, data center and customer training personnel as well as reclassification of certain research and development expenses related to research and development personnel who perform services related to implementation and customer support. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in the Company's solutions, the amortization of deferred solution and services costs, co-location facility costs and depreciation of the Company's data center assets, an allocation of general overhead costs and referral fees. Direct costs of third-party intellectual property include amounts paid for third-party licenses and related maintenance that are incorporated into the Company's software, with the costs amortized to cost of revenues over the useful lives of the purchased assets.

The amount of research and development expenses allocated to cost of revenues was $0.4 million for each of the three months ended June 30, 2014 and 2013, and was $0.8 million for each of the six months ended June 30, 2014 and 2013.

The Company capitalizes certain personnel costs directly related to the implementation of its solutions to the extent those costs are considered to be recoverable from future revenues. The Company amortizes the costs for a particular implementation once revenue recognition commences, and the Company amortizes those implementation costs over the remaining term of the customer agreement. Other costs not directly recoverable from future revenues are expensed in the period incurred. The Company capitalized implementation costs in the amount of $1.0 million and $0.9 million during the three months ended June 30, 2014 and 2013, respectively, and $1.8 million and $1.7 million during the six months ended June 30, 2014 and 2013, respectively.

Software Development Costs

Software development costs include salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, attributed to programmers, software engineers and quality control teams working on the Company's solutions. Costs related to software development incurred between reaching technological feasibility and the point at which the software solution is ready for general release have been insignificant through June 30, 2014, and accordingly all of the Company's software development costs have been expensed as incurred as research and development.

Research and Development Costs

Research and development costs include salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, third-party contractor expenses, software development tools, an allocation of facilities and depreciation expenses and other related expenses incurred in developing new solutions and upgrading and enhancing existing solutions. Research and development costs are expensed as incurred.

Advertising

All advertising costs of the Company are expensed the first time the advertising takes place. Advertising costs were $0.2 million for the three months ended June 30, 2014, and were insignificant for the three months ended June 30, 2013. Advertising costs were $0.3 million for the six months ended June 30, 2014, and were insignificant for the six months ended June 30, 2013.

Sales Tax

The Company presents sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, excludes them from revenues.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders' equity that result from transactions and economic events other than those with stockholders. The Company had no items of other comprehensive loss for the three and six months ended June 30, 2014 and 2013.

Stock-Based Compensation

Stock options awarded to employees, directors and consultants are measured at fair value at each grant date. The Company recognizes compensation expense ratably over the requisite service period of the option award. Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over the following 36 months.

The Company values stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company's employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to be the mid-point between the vesting date and end of the contractual term. The Company used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company assumed no dividend yield because it does not expect to pay dividends in the near future, which is consistent with the Company's history of not paying dividends.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs any positive evidence of its forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence, and it will adjust the valuation allowance as sufficient objective positive evidence becomes available.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through June 30, 2014, the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded.

Basic and Diluted Net Loss per Common Share

The Company uses the two-class method to compute net loss per common share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of the Company's Series A, B and C preferred stock are entitled, on a pari passu basis, to receive dividends when, as and if declared by the board of directors, prior and in preference to any declaration or payment of any dividend on the common stock or junior convertible preferred stock until such time as the total dividends paid on each share of Series A, B and C preferred stock is equal to the original issue price of the shares. Holders of junior convertible preferred stock are entitled to receive a pro rata share of any dividend declared, based on the number of shares of common and preferred stock outstanding. As a result, all series of the Company's preferred stock are considered participating securities.

Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the if-converted method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches as its diluted net income per share during the period. Due to net losses for each of the three and six months ended June 30, 2014 and 2013, basic and diluted net loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive.
The following table sets forth the computations of loss per share for the periods listed:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Numerators:
 
 
 
 
 
 
 
 
Loss from continuing operations attributable to common stockholders
 
$
(4,683
)
 
$
(3,708
)
 
$
(10,249
)
 
$
(5,998
)
Loss from discontinued operations attributable to common stockholders
 
—

 
—

 
—

 
(199
)
Net loss attributable to common stockholders
 
$
(4,683
)
 
$
(3,708
)
 
$
(10,249
)
 
$
(6,197
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
34,068

 
11,901

 
24,143

 
11,666

 
 
 
 
 
 
 
 
 
Loss from continuing operations per share, basic and diluted
 
$
(0.14
)
 
$
(0.31
)
 
$
(0.42
)
 
$
(0.51
)
Loss from discontinued operations per share, basic and diluted
 
$
—

 
$
—

 
$
—

 
$
(0.02
)
Net loss per common share, basic and diluted
 
$
(0.14
)
 
$
(0.31
)
 
$
(0.42
)
 
$
(0.53
)

Due to net losses for each of the three and six months ended June 30, 2014 and 2013, basic and diluted loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive. The following table sets forth the anti-dilutive common share equivalents for the periods listed:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Redeemable convertible preferred stock:
 
 
 
 
 
 
 
 
Series A preferred stock
 
—

 
7,908

 
—

 
7,908

Series B preferred stock
 
—

 
1,818

 
—

 
1,818

Series C preferred stock
 
—

 
2,605

 
—

 
1,756

Junior preferred stock
 
—

 
1,251

 
—

 
1,251

Stock options
 
6,302

 
5,567

 
6,302

 
5,567

Total anti-dilutive common share equivalents
 
6,302

 
19,149

 
6,302

 
18,300


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its condensed consolidated financial statements.
Debt
Debt
Debt

In September 2008, the Company entered into a loan and security agreement with a financial institution to provide a line of credit and term loan facility. The loan and security agreement was amended periodically as the Company's operations grew, most recently in May 2012 when the line of credit was increased from $7.0 million to $10.0 million. Amounts borrowed under the line of credit which were deemed an accounts receivable advance accrued interest at an annual rate equal to the greater of the financial institution's prime rate plus 1.50%, or 5.50%. Amounts borrowed under the line of credit which were deemed a contract revenue advance accrued interest at an annual rate equal to the greater of the financial institution's prime rate plus 2.25%, or 6.25%. From January 1, 2013 through the April 2013 termination of the loan and security agreement, the Company paid interest of 5.50% on borrowings deemed accounts receivable advances, and made no borrowings deemed to be contract revenue advances. In April 2013 the Company entered into a new credit agreement with another financial institution at which time the Company paid and terminated this loan and security agreement.

In April 2013 the Company entered into a secured credit facility agreement with Wells Fargo Bank, National Association, or Wells Fargo, which provides a line of credit of up to $25.0 million, or the Credit Facility. The amount that can be borrowed under the Credit Facility is limited to the lesser of $25.0 million or 75% of the Company's trailing twelve-month recurring revenues. Access to the total borrowings available under the Credit Facility is restricted based on covenants related to the Company's minimum liquidity, trailing twelve-month recurring revenues and adjusted EBITDA. Amounts borrowed under the Credit Facility accrue interest, at the Company's election at either: (i) the per annum rate equal to the LIBOR rate plus an applicable margin; or (ii) the current base rate plus the greater of the U.S. Federal Funds rate plus one percentage point, the one-month LIBOR plus one percentage point, or the lending financial institution's prime rate. The terms of the Credit Facility require that the Company maintain advances of at least $5.0 million at all times. The Company pays a monthly fee based on the total unused borrowings balance, an annual administrative fee and the initial closing fee, which is paid in three equal annual installments over the first three years of the Credit Facility. The Credit Facility matures in April 2017, at which time any outstanding borrowings and accrued interest become payable. In April 2013, the Company drew an advance on the Credit Facility of $2.5 million to pay off its existing loan and security agreement with another institution. In June 2013, the Company drew an advance on the Credit Facility of $3.9 million to fund capital expenditures and secured a letter of credit for the benefit of the landlord of its new corporate headquarters in the amount of $3.0 million. On February 26, 2014, the Company drew an advance of $12.5 million on the Credit Facility, which was subsequently repaid in full on March 17, 2014. On March 24, 2014, the Company entered into Amendment Number One to the Credit Facility Agreement with Wells Fargo in connection with, and effective upon, the closing of the Company's initial public offering of shares of its common stock, or IPO, which occurred on March 25, 2014. The amendment primarily modified the definition of “Change of Control” in the Credit Facility agreement. On April 22, 2014, the Company paid $4.2 million on the Credit Facility.

As of June 30, 2014, the Company had borrowings of $2.1 million and a secured letter of credit of $3.0 million against the Credit Facility, leaving an available balance of up to $19.9 million, and the interest rate applicable to the Credit Facility was 4.7%. The Credit Facility is collateralized by substantially all of the Company's assets and requires that the Company maintain certain financial covenants as provided in the Credit Facility agreement. The Company was in compliance with all financial covenants as of June 30, 2014.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Operating Lease Commitments
The Company leases office space for its corporate headquarters in Austin, Texas under a non-cancelable operating lease that expires in April 2021 and the Company leases office space for a regional sales office in Atlanta, Georgia under a non-cancelable operating lease that expires in January 2016. In addition, the Company leases office space for its previous corporate headquarters in Austin, Texas under two non-cancelable operating leases that expire in September 2014 and March 2015 and all of the rentable space covered by those leases has been sublet to tenants for substantially all of the remainder of the leases. Rent expense under operating leases was $0.3 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and $0.5 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively. In 2013, the Company moved to its new headquarters. As a result, the Company vacated its former leased headquarters and recorded an estimated unoccupied lease charge of $0.1 million for the remaining contractual lease payments less estimated sublease income.
Capital Lease Commitments
The Company has entered into various capital lease arrangements to obtain property and equipment for its data center and corporate operations. These agreements expire over various terms from September 2014 through May 2017 and the leases are secured by the underlying leased property and equipment.
Legal Proceedings
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that, if determined adversely to the Company, would have a material adverse effect on the Company.
Stockholders' Equity
Stockholders' Equity
Stockholder's Equity
Initial Public Offering

On March 25, 2014, the Company completed its IPO of 7,761 shares of common stock at $13.00 per share. The total shares sold in the IPO included 1,511 shares sold by selling stockholders. After deducting the payment of underwriters' discounts and commissions and offering costs, the net proceeds to the Company from the sale of shares in the offering were approximately $72.6 million.

Underwriter's Exercise Of Option to Purchase Additional Shares

On April 2, 2014, pursuant to the terms of the Company's IPO, which occurred on March 25, 2014, the underwriters exercised their option to purchase an additional 1,164 shares to cover over-allotments. After deducting the payment of underwriters' discounts, commissions and offering costs, including unpaid offering costs that are classified as liabilities as of June 30, 2014, the Company will receive net proceeds from the sale of shares totaling approximately $13.7 million.

Conversion of Redeemable Common and Preferred Stock

Immediately prior to the closing of the IPO, which occurred on March 25, 2014, each share of the Company's outstanding preferred, junior preferred and redeemable common stock was converted into one share of undesignated common stock. The following table presents the conversion of all classes of stock on March 25, 2014:
 
 
Prior to Conversion
 
Subsequent to Conversion
Convertible preferred stock
 
 
 
 
       Series A
 
7,908

 
—

       Series B
 
1,818

 
—

       Series C
 
2,605

 
—

Redeemable common stock
 
3,829

 
—

Junior preferred stock
 
1,251

 
—

Undesignated common stock
 
—

 
17,412

Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
In March 2014, the Company's board of directors approved the 2014 Equity Incentive Plan, or 2014 Plan, under which stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash-based or stock-based awards may be granted to employees, consultants and directors. Shares of common stock that are issued and available for issuance under the 2014 Plan consist of authorized, but unissued or reacquired shares of common stock or any combination thereof.
A total of 1,850 shares of the Company's common stock was initially authorized and reserved for issuance under the 2014 Plan. This reserve will automatically increase on January 1, 2015 and each subsequent anniversary through 2024, by an amount equal to the smaller of (a) 4.5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company's board of directors. This reserve is automatically increased to include any outstanding shares under the Company's 2007 Stock Plan, or 2007 Plan, at the time of its termination or issuable upon expiration or termination of options granted under the Company's 2007 Plan that expire or terminate without having been exercised in full. Pursuant to the terms of the 2014 Plan, 107 shares available for future issuance under the 2007 Plan were transferred to the 2014 Plan, providing a total of 1,957 shares of common stock allocated for issuance under the plan. In addition, 17 shares have been returned to the 2014 Plan as a result of termination of options that expired or terminated without having been exercised under the previously terminated 2007 Plan, resulting in a total of 1,974 shares available for issuance under the 2014 Plan. As of June 30, 2014, options to purchase a total of 126 shares of common stock have been granted under the 2014 Plan, and 1,848 shares of common stock remain available for future issuance under the 2014 Plan.
In July 2007, the Company adopted the 2007 Plan under which options or stock purchase rights may be granted to employees, consultants and directors. In February 2014, the board of directors, under the authority granted to it by the 2007 Plan, increased the number of shares available to be granted under the plan by 1,400 shares, and as of June 30, 2014, a total of 9,204 shares of common stock were allocated for issuance under the plan. Upon the completion of the Company's IPO in March 2014, the board of directors terminated the 2007 Plan in connection with the IPO and pursuant to the terms of the 2014 Plan, 107 shares that were available for future issuance under the 2007 Plan at such time were transferred to the 2014 Plan. No shares remain available for future issuance of awards under the 2007 Plan. The 2007 Plan will continue to govern the terms and conditions of all outstanding equity awards granted under the 2007 Plan. Shares of common stock that are issued and were available for issuance under the 2007 Plan consist of authorized, but unissued or reacquired shares of common stock or any combination thereof.
The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
 
1.6%
 
0.7%
 
1.2 - 1.9%
 
0.7 - 0.8%
Expected life (in years)
 
4.8
 
4.8
 
3.8 - 6.6
 
4.8
Expected volatility
 
46.8%
 
47.9%
 
45.1 - 46.8%
 
47.9 - 49.4%
Dividend yield
 
—
 
—
 
—
 
—
Weighted-average grant date fair value per share          
 
$6.40
 
$3.05
 
$5.42
 
$3.05

Stock option activity during the six months ended June 30, 2014 was as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise Price
Balance as of January 1, 2014
 
5,422

 
$
2.76

Granted
 
1,880

 
8.74

Exercised
 
(979
)
 
1.03

Forfeited
 
(21
)
 
6.18

Balance as of June 30, 2014
 
6,302

 
$
4.80


The summary of stock options outstanding as of June 30, 2014 was as follows:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
$0.29 - $0.35
 
1,229

 
$
0.33

 
3.7
 
1,229

 
$
0.33

 
3.7

$0.54 - $0.84
 
597

 
0.74

 
5.5
 
580

 
0.73

 
5.5

$1.74 - $3.10
 
1,187

 
2.80

 
7.4
 
821

 
2.71

 
7.3

$4.00 - $7.82
 
1,410

 
6.88

 
6.1
 
388

 
6.04

 
6.2

$8.35
 
1,752

 
8.35

 
6.6
 
—

 
—

 
—

$13.00 - $15.50
 
127

 
14.07

 
6.8
 
7

 
13.00

 
6.7

 
 
6,302

 
$
4.80

 
6.0
 
3,025

 
$
1.81

 
5.3


The aggregate intrinsic value of stock options exercised during each of the three months ended June 30, 2014 and 2013 was $0.2 million and $3.6 million, respectively. The aggregate intrinsic value of stock options exercised during each of the six months ended June 30, 2014 and 2013 was $7.7 million and $4.3 million, respectively. The total fair value of stock options vested during each of the three months ended June 30, 2014 and 2013 was $0.4 million and $0.3 million, respectively. The total fair value of stock options vested during each of the six months ended June 30, 2014 and 2013 was $0.8 million and $0.6 million, respectively. As of June 30, 2014, total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, related to stock options was $12.7 million, which the Company expects to recognize over the next 3.3 years.
Income Taxes
Income Taxes
Income Taxes
In accordance with applicable accounting guidance, the income tax provision for the three and six month periods ended June 30, 2014 is based on the estimated annual effective tax rate for fiscal year 2014. The estimated effective tax rate may be subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year, along with other items that may affect the rate, change.

For the three and six month periods ended June 30, 2014, the Company’s provision for income taxes reflected an effective tax rate of approximately 0.3%, and for the three and six month periods ended June 30, 2013 the Company’s provision for income taxes reflected an effective tax rate of approximately 0.4% and 0.3%, respectively. For the three and six months ended June 30, 2014 and 2013, the Company’s effective tax rate was lower than the U.S. federal statutory rate primarily due to changes to its valuation allowance.

The Company has significant deferred tax assets related to its net operating loss carryforwards and tax credits and has provided a valuation allowance for the full amount of its deferred tax assets, as it is not more likely than not that any future benefit from deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards will be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs any positive evidence of its forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence, and it will adjust the valuation allowance as sufficient objective positive evidence becomes available.

The Company had no unrecognized tax benefits as of June 30, 2014. The Company’s tax years 2010 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the Company is not currently under examination by any taxing jurisdiction.
Discontinued Operations
Discontinued Operations
Discontinued Operations
On March 1, 2013, the Company distributed all of the shares of a subsidiary to the Company's stockholders in a spin-off. However, since all shares of the subsidiary were distributed in 2013, the Company's condensed consolidated statements of operations and statements of cash flows have been presented to show the discontinued operations of the subsidiary separately from continuing operations for all periods presented. Since the transaction was between entities under common control, the distribution of the shares of the subsidiary did not result in a gain or loss on distribution as it was recorded at historical carrying values.
Subsequent Events
Subsequent Events
Subsequent Events
New Facilities Lease
On July 18, 2014, the Company entered into an office lease agreement, or the Lease, with CREF Aspen Lake Building II, LLC to lease approximately 70,000 rentable square feet, or the Premises, of an office building to be located immediately adjacent to the Company’s current headquarters in order to expand the Company’s headquarters. The Lease provides for phased commencement dates, with commencement of the first phase covering 55,000 rentable square feet anticipated to occur on June 1, 2015, or the Initial Commencement Date, with the remaining space becoming available nine months thereafter. The actual commencement dates are subject to timely completion of the Premises. The term of the Lease commences on the Initial Commencement Date and runs 124 months, with a five year renewal option, and the rent obligations under the Lease begin with rents of $98 per month, which escalate over the course of the Lease to $160 per month in the final four months of the Lease's term.
Credit Facility Amendment
On August 11, 2014, the Company and its wholly-owned subsidiary, Q2 Software, Inc., entered into Amendment Number Two to Credit Agreement with Wells Fargo Bank, National Association, or the Amendment. The Amendment modifies the Credit Agreement dated April 11, 2013, or the Agreement, by and among the Company, Q2 Software, Inc., the lenders named therein, and Wells Fargo National Association, as administrative agent, to among other things: add an accordion feature which allows the Company to increase its maximum borrowings under the Agreement by up to $25 million, subject to certain conditions and limitations; and modify and eliminate certain of the Company’s financial covenants and fees it owes under the Agreement.
Summary of Significant Accounting Policies (Policies)
Basis of Presentation 
As used in this report, the terms "we," "us," or "our" refer to Q2 Holdings, Inc. and its wholly-owned subsidiary. These interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and Securities and Exchange Commission, or SEC, requirements for interim financial statements. The interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
Principles of Consolidation 
In the Company's opinion, the accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2013, which are included in the Company's prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the SEC on March 20, 2014. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other period.

Use of Estimates 
Use of Estimates

The preparation of the accompanying interim unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include stock-based compensation, the useful lives of property and equipment and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ significantly from those estimates.
Cash and Cash Equivalents 
Cash and Cash Equivalents

The Company considers all highly liquid investments acquired with an original maturity of ninety days or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments.
Restricted Cash 
Restricted Cash

Restricted cash consists of deposits held in a money market account for leased office space.
Fair Value of Financial Instruments 
Fair Value of Financial Instruments

The carrying values of the Company's financial instruments, principally cash equivalents, accounts receivable, restricted cash and accounts payable, approximated their fair values due to the short period of time to maturity or repayment. The carrying values of the Company's debt instruments approximated their fair value based on rates currently available to the Company. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:

•
Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;

•
Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and

•
Level III—Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own assumptions.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Concentration of Credit Risk 
Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash and accounts receivable. The Company's cash and cash equivalents and restricted cash are placed with high credit quality financial institutions and issuers, and at times may exceed federally-insured limits. The Company has not experienced any loss relating to cash and cash equivalents or restricted cash in these accounts. The Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.
Accounts Receivable 
Accounts Receivable

Accounts receivable are stated at net realizable value, including both billed and unbilled receivables to customers. Unbilled receivable balances arise primarily when the Company earns revenues based on the number of registered users and the number of bill-pay and certain other transactions that registered users perform on the Company's virtual banking solutions in excess of the levels included in the Company's minimum subscription fee. Generally, billing for such revenues occurs one month in arrears.

The Company assesses the collectability of outstanding accounts receivable on an ongoing basis and maintains an allowance for doubtful accounts for accounts receivable deemed uncollectable. This allowance is recorded as a reduction against accounts receivable. As of June 30, 2014 and December 31, 2013, the Company did not provide for an allowance for doubtful accounts, as all amounts outstanding were deemed collectable. Historically, the Company's collection experience has not varied significantly, and bad debt expenses have been insignificant.

The Company maintains a reserve for estimated sales credits issued to customers for billing disputes or other service-related reasons. This allowance is recorded as a reduction against current period revenues and accounts receivable. In estimating this allowance, the Company analyzes prior periods to determine the amounts of sales credits issued to customers compared to the revenues in the period that related to the original customer invoice. This estimate is analyzed quarterly and adjusted as necessary.
Deferred Implementation Costs and Deferred Solution and Other Costs 
Deferred Implementation Costs

The Company capitalizes certain personnel and other costs, such as employee salaries, benefits and the associated payroll taxes that are direct and incremental to the implementation of its solutions. The Company analyzes implementation costs that may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The Company assesses the recoverability of its deferred implementation costs by comparing the greater of the amount of the non-cancellable portion of a customer's contract and the non-refundable customer prepayments received as it relates to the specific implementation costs incurred. The Company begins amortizing the deferred implementation costs for an implementation once the revenue recognition criteria have been met, and the Company amortizes those deferred implementation costs ratably over the remaining term of the customer agreement. The portion of deferred implementation costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred implementation costs, current portion, and the remainder is recorded in long-term assets as deferred implementation costs, net of current portion.

Deferred Solution and Other Costs

The Company capitalizes sales commissions and other third-party costs, such as third party licenses and maintenance related to its customer agreements. The Company capitalizes sales commissions because the commission charges are so closely related to the revenues from the non-cancellable customer agreements that they should be recorded as an asset and charged to expense over the same period that the related revenue is recognized. The Company begins amortizing deferred solution and other costs for a particular customer agreement once the revenue recognition criteria are met, and the Company amortizes those deferred costs over the remaining term of the customer agreement. The Company analyzes solution and other costs that may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The portion of capitalized costs expected to be amortized during the succeeding twelve-month period is recorded in current assets as deferred solution and other costs, current portion, and the remainder is recorded in long-term assets as deferred solution and other costs, net of current portion. Deferred commissions were $5.7 million and $4.6 million as of June 30, 2014 and December 31, 2013, respectively.
Property and Equipment 
Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets. Maintenance and repairs that do not extend the life of or improve an asset are expensed in the period incurred.

The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
 
3 - 5 years
Purchased software and licenses
 
3 - 5 years
Furniture and fixtures
 
7 years
Leasehold improvements
 
Lesser of estimated useful life or lease term
Deferred Revenues 
Deferred Revenues

Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well as initial subscription fees. The Company recognizes deferred revenues as revenues when the services are performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when services are performed and billed. Deferred revenues that are expected to be recognized as revenues during the succeeding twelve month period are recorded in current liabilities as deferred revenues, current portion and the remaining portion is recorded in long-term liabilities as deferred revenues, net of current portion.
Revenues 
Revenues

All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions within a single operating segment. The Company derives the substantial majority of its revenues from subscription fees for the use of its solutions hosted in the Company's data centers as well as revenues for implementation and customer support services related to the Company's solutions. A small portion of the Company's customers host the Company's solutions in their own data centers under term license and maintenance agreements, and the Company recognizes the corresponding revenues ratably over the term of those customer agreements.

Revenues are recognized net of sales credits and allowances. The Company begins to recognize revenues for a customer when all of the following criteria are satisfied:

•
there is persuasive evidence of an arrangement;

•
the service has been or is being provided to the customer;

•
the collection of the fees is reasonably assured; and

•
the amount of fees to be paid by the customer is fixed or determinable.

Determining whether and when these criteria have been met can require significant judgment and estimates. In general, revenue recognition commences when the Company's solutions are implemented and made available to the customers.

The Company's software solutions are available for use in hosted application arrangements under subscription fee agreements. Subscription fees from these applications, including related customer support, are recognized ratably over the customer agreement term beginning on the date the solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the Company's revenue recognition criteria have been met.

The Company considers subscription fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within the Company's standard payment terms. In determining whether collection of subscription fees is reasonably assured, the Company considers financial and other information about customers, such as a customer's current credit-worthiness and payment history over time. Historically bad debt expenses have not been significant.

The Company enters into arrangements with multiple-deliverables that generally include multiple subscriptions and implementation services.

For multiple-deliverable arrangements, arrangement consideration is allocated to deliverables based on their relative selling price. In order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, each deliverable must be accounted for separately. The Company's subscription services have standalone value as such services are often sold separately. In determining whether implementation services have standalone value apart from the subscription services, the Company considers various factors including the availability of the services from other vendors. To date, the Company has concluded that the implementation services included in multiple-deliverable arrangements do not have standalone value. As a result, when implementation services are sold in a multiple-deliverable arrangement, the Company defers any arrangement fees for implementation services and recognizes such amounts ratably over the period of performance for the initial agreement term.

When multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence of selling price, or VSOE, if available, third-party evidence of selling price, or TPE, if VSOE is not available or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. The Company has not established VSOE for its subscription services due to lack of pricing consistency, the introduction of new services and other factors. The Company has determined that TPE is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, the Company uses BESP to determine the relative selling price. The amount of revenue allocated to delivered items is limited by contingent revenues.

The Company determined BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company's discounting practices, the size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and agreement prices. As the Company's go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes in relative selling prices, and include both VSOE and BESP.

Subscription Fee Revenues

The Company's solutions are available as hosted solutions under subscription fee agreements without licensing perpetual rights to the software. Subscription fees from a hosted solution are recognized monthly over the customer agreement term beginning on the date the Company's solution is made available to the customer. Additional fees for monthly usage above the levels included in the standard subscription fee, which include fees for transactions processed during the period, are recognized as revenue in the month when the usage amounts are determined and reported. Any revenues related to upfront implementation services are recognized ratably over the same customer agreement term. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met.

Professional Services Revenues

When professional services are not combined with subscription services or term licenses as a single unit of accounting, these professional services revenues are recognized as the services are performed. Revenues from professional services not combined with subscription services were not significant in the periods presented.

Certain out-of-pocket expenses billed to customers are recorded as revenues rather than an offset to the related expense. Revenues recorded from out-of-pocket expense reimbursements totaled approximately $0.2 million and $0.1 million during the three months ended June 30, 2014 and 2013, respectively, and were $0.3 million and $0.2 million for the six months ended June 30, 2014 and 2013, respectively. The out-of-pocket expenses are reported in cost of revenues.

Term Licenses and Maintenance Revenues

A small portion of the Company's customers host and manage the Company's solutions on-premises or in third-party data centers under term license and maintenance agreements. Term licenses sold with maintenance, which entitles the customer to technical support and upgrades and updates to the software made available on a when-and-if-available basis, are accounted for under Accounting Standards Codification 985-605, "Software Revenue Recognition." The Company does not have VSOE of fair value for the maintenance and professional services so the entire arrangement consideration is recognized monthly over the term of the software license when all of the other revenue recognition criteria have been met.
Cost of Revenues 
Cost of Revenues

Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, for employees providing services to the Company's customers. Costs associated with these services include the costs of the Company's implementation, customer support, data center and customer training personnel as well as reclassification of certain research and development expenses related to research and development personnel who perform services related to implementation and customer support. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in the Company's solutions, the amortization of deferred solution and services costs, co-location facility costs and depreciation of the Company's data center assets, an allocation of general overhead costs and referral fees. Direct costs of third-party intellectual property include amounts paid for third-party licenses and related maintenance that are incorporated into the Company's software, with the costs amortized to cost of revenues over the useful lives of the purchased assets.

The amount of research and development expenses allocated to cost of revenues was $0.4 million for each of the three months ended June 30, 2014 and 2013, and was $0.8 million for each of the six months ended June 30, 2014 and 2013.

The Company capitalizes certain personnel costs directly related to the implementation of its solutions to the extent those costs are considered to be recoverable from future revenues. The Company amortizes the costs for a particular implementation once revenue recognition commences, and the Company amortizes those implementation costs over the remaining term of the customer agreement. Other costs not directly recoverable from future revenues are expensed in the period incurred.
Software Development Costs 
Software Development Costs

Software development costs include salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, attributed to programmers, software engineers and quality control teams working on the Company's solutions. Costs related to software development incurred between reaching technological feasibility and the point at which the software solution is ready for general release have been insignificant through June 30, 2014, and accordingly all of the Company's software development costs have been expensed as incurred as research and development.
Research and Development Costs 
Research and Development Costs

Research and development costs include salaries and other personnel-related costs, including employee benefits, bonuses and stock-based compensation, third-party contractor expenses, software development tools, an allocation of facilities and depreciation expenses and other related expenses incurred in developing new solutions and upgrading and enhancing existing solutions. Research and development costs are expensed as incurred.

Advertising 
Advertising

All advertising costs of the Company are expensed the first time the advertising takes place.
Sales Tax 
Sales Tax

The Company presents sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, excludes them from revenues.
Comprehensive Loss 
Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders' equity that result from transactions and economic events other than those with stockholders.
Stock-Based Compensation 
Stock-Based Compensation

Stock options awarded to employees, directors and consultants are measured at fair value at each grant date. The Company recognizes compensation expense ratably over the requisite service period of the option award. Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over the following 36 months.

The Company values stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company's employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to be the mid-point between the vesting date and end of the contractual term. The Company used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company assumed no dividend yield because it does not expect to pay dividends in the near future, which is consistent with the Company's history of not paying dividends.
Income Taxes 
Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, the Company has provided a full valuation allowance against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs any positive evidence of its forecasted future results. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to monitor the positive and negative evidence, and it will adjust the valuation allowance as sufficient objective positive evidence becomes available.

The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense. Through June 30, 2014, the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded.

Basic and Diluted Net Loss per Common Share 
Basic and Diluted Net Loss per Common Share

The Company uses the two-class method to compute net loss per common share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of the Company's Series A, B and C preferred stock are entitled, on a pari passu basis, to receive dividends when, as and if declared by the board of directors, prior and in preference to any declaration or payment of any dividend on the common stock or junior convertible preferred stock until such time as the total dividends paid on each share of Series A, B and C preferred stock is equal to the original issue price of the shares. Holders of junior convertible preferred stock are entitled to receive a pro rata share of any dividend declared, based on the number of shares of common and preferred stock outstanding. As a result, all series of the Company's preferred stock are considered participating securities.

Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the if-converted method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches as its diluted net income per share during the period.
Recent Accounting Pronouncements 
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its condensed consolidated financial statements.
Summary of Significant Accounting Policies (Tables)
Schedule of Useful Lives of Property and Equipment 
The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
 
3 - 5 years
Purchased software and licenses
 
3 - 5 years
Furniture and fixtures
 
7 years
Leasehold improvements
 
Lesser of estimated useful life or lease term
Schedule of Earnings Per Share, Basic and Diluted 
The following table sets forth the computations of loss per share for the periods listed:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Numerators:
 
 
 
 
 
 
 
 
Loss from continuing operations attributable to common stockholders
 
$
(4,683
)
 
$
(3,708
)
 
$
(10,249
)
 
$
(5,998
)
Loss from discontinued operations attributable to common stockholders
 
—

 
—

 
—

 
(199
)
Net loss attributable to common stockholders
 
$
(4,683
)
 
$
(3,708
)
 
$
(10,249
)
 
$
(6,197
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
34,068

 
11,901

 
24,143

 
11,666

 
 
 
 
 
 
 
 
 
Loss from continuing operations per share, basic and diluted
 
$
(0.14
)
 
$
(0.31
)
 
$
(0.42
)
 
$
(0.51
)
Loss from discontinued operations per share, basic and diluted
 
$
—

 
$
—

 
$
—

 
$
(0.02
)
Net loss per common share, basic and diluted
 
$
(0.14
)
 
$
(0.31
)
 
$
(0.42
)
 
$
(0.53
)
Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share 
The following table sets forth the anti-dilutive common share equivalents for the periods listed:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Redeemable convertible preferred stock:
 
 
 
 
 
 
 
 
Series A preferred stock
 
—

 
7,908

 
—

 
7,908

Series B preferred stock
 
—

 
1,818

 
—

 
1,818

Series C preferred stock
 
—

 
2,605

 
—

 
1,756

Junior preferred stock
 
—

 
1,251

 
—

 
1,251

Stock options
 
6,302

 
5,567

 
6,302

 
5,567

Total anti-dilutive common share equivalents
 
6,302

 
19,149

 
6,302

 
18,300

Stockholders' Equity (Tables)
Schedule of Conversions of Stock
The following table presents the conversion of all classes of stock on March 25, 2014:
 
 
Prior to Conversion
 
Subsequent to Conversion
Convertible preferred stock
 
 
 
 
       Series A
 
7,908

 
—

       Series B
 
1,818

 
—

       Series C
 
2,605

 
—

Redeemable common stock
 
3,829

 
—

Junior preferred stock
 
1,251

 
—

Undesignated common stock
 
—

 
17,412

Stock-Based Compensation (Tables)
Schedule of Share-based Payment Award Assumptions for Estimating Fair Value of Stock Option Grants 
The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
 
1.6%
 
0.7%
 
1.2 - 1.9%
 
0.7 - 0.8%
Expected life (in years)
 
4.8
 
4.8
 
3.8 - 6.6
 
4.8
Expected volatility
 
46.8%
 
47.9%
 
45.1 - 46.8%
 
47.9 - 49.4%
Dividend yield
 
—
 
—
 
—
 
—
Weighted-average grant date fair value per share          
 
$6.40
 
$3.05
 
$5.42
 
$3.05
Schedule of Share-based Compensation, Stock Options, Activity 
Stock option activity during the six months ended June 30, 2014 was as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise Price
Balance as of January 1, 2014
 
5,422

 
$
2.76

Granted
 
1,880

 
8.74

Exercised
 
(979
)
 
1.03

Forfeited
 
(21
)
 
6.18

Balance as of June 30, 2014
 
6,302

 
$
4.80

Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range 
The summary of stock options outstanding as of June 30, 2014 was as follows:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
(in years)
$0.29 - $0.35
 
1,229

 
$
0.33

 
3.7
 
1,229

 
$
0.33

 
3.7

$0.54 - $0.84
 
597

 
0.74

 
5.5
 
580

 
0.73

 
5.5

$1.74 - $3.10
 
1,187

 
2.80

 
7.4
 
821

 
2.71

 
7.3

$4.00 - $7.82
 
1,410

 
6.88

 
6.1
 
388

 
6.04

 
6.2

$8.35
 
1,752

 
8.35

 
6.6
 
—

 
—

 
—

$13.00 - $15.50
 
127

 
14.07

 
6.8
 
7

 
13.00

 
6.7

 
 
6,302

 
$
4.80

 
6.0
 
3,025

 
$
1.81

 
5.3

Organization and Description of Business (Details)
Jun. 30, 2014
Q2 Software, Inc. [Member]
Feb. 28, 2013
cbanc Network, Inc. [Member]
Organization [Line Items]
 
 
Wholly owned subsidiary, ownership percentage
100.00% 
 
Wholly owned subsidiary, ownership percentage, prior to reorganization
 
100.00% 
Summary of Significant Accounting Policies (Details) (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Property, Plant and Equipment [Line Items]
 
 
 
 
 
Allowance for Sales Credits
$ 200,000 
 
$ 200,000 
 
$ 100,000 
Deferred commissions
5,700,000 
 
5,700,000 
 
4,600,000 
Property and Equipment [Abstract]
 
 
 
 
 
Revenues recorded from out-of-pocket expense reimbursements
200,000 
100,000 
300,000 
200,000 
 
Research and development
2,787,000 1
2,152,000 1
5,523,000 
4,018,000 
 
Capitalized implementation costs
1,000,000 
900,000 
1,800,000 
1,700,000 
 
Advertising costs
200,000 
 
300,000 
 
 
Numerators: [Abstract]
 
 
 
 
 
Loss from continuing operations attributable to common stockholders
(4,683,000)
(3,708,000)
(10,249,000)
(5,998,000)
 
Loss from discontinued operations attributable to common stockholders
0 
0 
0 
(199,000)
 
Net loss
(4,683,000)
(3,708,000)
(10,249,000)
(6,197,000)
 
Denominator: [Abstract]
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted (shares)
34,068 
11,901 
24,143 
11,666 
 
Loss from continuing operations per share, basic and diluted (dollars per share)
$ (0.14)
$ (0.31)
$ (0.42)
$ (0.51)
 
Loss from discontinued operations per share, basic and diluted (dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ (0.02)
 
Net loss per common share, basic and diluted (dollars per share)
$ (0.14)
$ (0.31)
$ (0.42)
$ (0.53)
 
Antidilutive securities excluded from computation of loss per share (shares)
6,302 
19,149 
6,302 
18,300 
 
Computer hardware and equipment [Member] |
Minimum [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Estimated useful life
 
 
3 years 
 
 
Computer hardware and equipment [Member] |
Maximum [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Estimated useful life
 
 
5 years 
 
 
Purchased software and licenses [Member] |
Minimum [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Estimated useful life
 
 
3 years 
 
 
Purchased software and licenses [Member] |
Maximum [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Estimated useful life
 
 
5 years 
 
 
Furniture and fixtures [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Estimated useful life
 
 
7 years 
 
 
Cost of revenues [Member]
 
 
 
 
 
Property and Equipment [Abstract]
 
 
 
 
 
Research and development
$ 400,000 
$ 400,000 
$ 800,000 
$ 800,000 
 
Series A Preferred Stock [Member]
 
 
 
 
 
Denominator: [Abstract]
 
 
 
 
 
Antidilutive securities excluded from computation of loss per share (shares)
0 
7,908 
0 
7,908 
 
Series B Preferred Stock [Member]
 
 
 
 
 
Denominator: [Abstract]
 
 
 
 
 
Antidilutive securities excluded from computation of loss per share (shares)
0 
1,818 
0 
1,818 
 
Series C Preferred Stock [Member]
 
 
 
 
 
Denominator: [Abstract]
 
 
 
 
 
Antidilutive securities excluded from computation of loss per share (shares)
0 
2,605 
0 
1,756 
 
Junior Preferred Stock [Member]
 
 
 
 
 
Denominator: [Abstract]
 
 
 
 
 
Antidilutive securities excluded from computation of loss per share (shares)
0 
1,251 
0 
1,251 
 
Stock options [Member]
 
 
 
 
 
Denominator: [Abstract]
 
 
 
 
 
Antidilutive securities excluded from computation of loss per share (shares)
6,302 
5,567 
6,302 
5,567 
 
Stock options [Member]
 
 
 
 
 
Stock-Based Compensation [Abstract]
 
 
 
 
 
Option vesting percentage on first anniversary of grant date
 
 
25.00% 
 
 
Period of monthly vesting of options after first anniversary of grant date
 
 
36 months 
 
 
Debt (Details) (USD $)
6 Months Ended 0 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 1 Months Ended
Jun. 30, 2014
Jun. 30, 2013
May 31, 2012
Line of Credit [Member]
2008 Line of Credit and Loan Term Facility [Member]
Apr. 30, 2012
Line of Credit [Member]
2008 Line of Credit and Loan Term Facility [Member]
Apr. 22, 2014
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Mar. 17, 2014
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Feb. 26, 2014
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Jun. 30, 2013
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Apr. 30, 2013
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
annual_installment
Jun. 30, 2014
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Jun. 30, 2014
Line of Credit [Member]
2013 Secured Credit Facility [Member]
Minimum [Member]
Wells Fargo [Member]
Apr. 30, 2013
Line of Credit Accounts Receivable Advance [Member]
2008 Line of Credit and Loan Term Facility [Member]
May 31, 2012
Line of Credit Accounts Receivable Advance [Member]
2008 Line of Credit and Loan Term Facility [Member]
May 31, 2012
Line of Credit Accounts Receivable Advance [Member]
2008 Line of Credit and Loan Term Facility [Member]
Prime Rate [Member]
May 31, 2012
Line of Credit Contract Revenue Advance [Member]
2008 Line of Credit and Loan Term Facility [Member]
May 31, 2012
Line of Credit Contract Revenue Advance [Member]
2008 Line of Credit and Loan Term Facility [Member]
Prime Rate [Member]
Jun. 30, 2014
Letter of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Jun. 30, 2013
Letter of Credit [Member]
2013 Secured Credit Facility [Member]
Wells Fargo [Member]
Line of Credit Facility [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repayments of Lines of Credit
$ 16,710,000 
$ 2,500,000 
 
 
$ 4,200,000 
$ 12,500,000 
 
 
 
 
 
 
 
 
 
 
 
 
Line of credit facility, maximum borrowing capacity
 
 
10,000,000.0 
7,000,000.0 
 
 
 
 
25,000,000.0 
 
 
 
 
 
 
 
 
 
Basis spread on variable interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
1.50% 
 
2.25% 
 
 
Fixed interest rate
 
 
 
 
 
 
 
 
 
4.652% 
 
5.50% 
5.50% 
 
6.25% 
 
 
 
Line of credit facility, maximum borrowing capacity as a percentage of the Company's trailing twelve-month recurring revenues
 
 
 
 
 
 
 
 
75.00% 
 
 
 
 
 
 
 
 
 
Borrowings under line of credit
 
 
 
 
 
 
 
 
 
2,100,000 
5,000,000.0 
 
 
 
 
 
 
 
Line of credit facility, initial closing fee, number of annual installments
 
 
 
 
 
 
 
 
3 
 
 
 
 
 
 
 
 
 
Period of repayment for initial closing fee on line of credit facility
 
 
 
 
 
 
 
 
 
3 years 
 
 
 
 
 
 
 
 
Advances on line of credit
12,500,000 
6,350,000 
 
 
 
 
12,500,000 
3,900,000 
2,500,000 
 
 
 
 
 
 
 
 
 
Secured letters of credit amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,000,000 
3,000,000.0 
Available balance on line of credit facility
 
 
 
 
 
 
 
 
 
$ 19,900,000 
 
 
 
 
 
 
 
 
Commitments and Contingencies (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Commitments and Contingencies Disclosure [Abstract]
 
 
 
 
Rent expense under operating leases
$ 300,000 
$ 400,000 
$ 500,000 
$ 800,000 
Unoccupied lease charges
$ 0 
$ 148,000 
$ 0 
$ 148,000 
Stockholders' Equity (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
0 Months Ended 6 Months Ended 0 Months Ended
Mar. 26, 2014
Jun. 30, 2014
Jun. 30, 2013
Mar. 26, 2014
Series A Preferred Stock [Member]
Mar. 26, 2014
Series B Preferred Stock [Member]
Mar. 26, 2014
Series C Preferred Stock [Member]
Apr. 2, 2014
Common Stock [Member]
Mar. 26, 2014
Common Stock [Member]
Mar. 26, 2014
Convertible Preferred Stock [Member]
Class of Stock [Line Items]
 
 
 
 
 
 
 
 
 
Share issued in initial public offering (shares)
 
 
 
 
 
 
1,164,000 
7,761,000 
 
Share price (per share)
 
 
 
 
 
 
 
$ 13.00 
 
Shares sold by selling shareholders (shares)
 
 
 
 
 
 
 
1,511,000 
 
Proceeds from the issuance of common stock, net of issuance costs
$ 72,600 
$ 86,461 
$ 0 
 
 
 
$ 13,700 
 
 
Convertible stock, shares issued upon conversion
1 
 
 
 
 
 
 
 
 
Conversion of Common and Preferred Stock [Abstract]
 
 
 
 
 
 
 
 
 
Conversion of stock, shares converted
 
 
 
7,908,000 
1,818,000 
2,605,000 
 
3,829,000 
1,251,000 
Undesignated common stock, subsequent to conversion
 
 
 
 
 
 
 
17,412,000 
 
Stock-Based Compensation (Details) (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Mar. 31, 2014
2014 Stock Plan [Member]
Jun. 30, 2014
2014 Stock Plan [Member]
Mar. 31, 2014
2007 Stock Plan [Member]
Feb. 28, 2014
2007 Stock Plan [Member]
Jun. 30, 2014
2007 Stock Plan [Member]
Jun. 30, 2014
Stock options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
 
 
 
 
Initial reserve of shares under the plan
 
 
 
 
 
1,850,000 
 
 
 
 
Additional shares authorized under the plan, percentage increase
 
 
 
 
 
4.50% 
 
 
 
 
Shares reserved for future issuance
 
 
 
 
1,957,000 
1,974,000 
 
 
9,204,000 
 
Granted (shares)
 
 
1,880,000 
 
 
126,000 
 
 
 
 
Shares available for future issuance under the plan
 
 
 
 
 
1,848,000 
 
 
 
 
Additional shares authorized under the plan
 
 
 
 
 
 
 
1,400,000 
 
 
Shares transferred to new plan
 
 
 
 
 
 
107,000 
 
 
 
Shares transferred from the previous plan that expired or terminated
 
 
 
 
17,000 
 
 
 
 
 
Aggregate intrinsic value of options exercised in period
$ 0.2 
$ 3.6 
$ 7.7 
$ 4.3 
 
 
 
 
 
 
Total fair market value of stock options vested during the period
0.4 
0.3 
0.8 
0.6 
 
 
 
 
 
 
Unrecognized stock-based compensation expense, related to stock options
$ 12.7 
 
$ 12.7 
 
 
 
 
 
 
 
Unrecognized stock-based compensation, related to stock options, period for recognition
 
 
 
 
 
 
 
 
 
3 years 3 months 18 days 
Stock-Based Compensation Assumptions Used in Estimating Fair Value of Options Granted (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Risk-free interest rate, minimum
 
 
1.20% 
0.70% 
Risk-free interest rate, maximum
 
 
1.90% 
0.80% 
Risk-free interest rate
1.60% 
0.70% 
 
 
Expected life (years)
4 years 9 months 18 days 
4 years 9 months 18 days 
 
4 years 9 months 18 days 
Expected volatility, minimum
 
 
45.10% 
47.90% 
Expected volatility, maximum
 
 
46.80% 
49.40% 
Expected volatility
46.80% 
47.90% 
 
 
Dividend yield
0.00% 
0.00% 
0.00% 
0.00% 
Weighted-average grant date fair value per share (dollars per share)
$ 6.40 
$ 3.05 
$ 5.42 
$ 3.05 
Minimum [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Expected life (years)
 
 
3 years 9 months 18 days 
 
Maximum [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Expected life (years)
 
 
6 years 7 months 6 days 
 
Stock-Based Compensation Stock Option Activity (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
 
Options outstanding beginning (shares)
5,422 
Granted (shares)
1,880 
Exercised (shares)
(979)
Forfeited (shares)
(21)
Options outstanding, ending (shares)
6,302 
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
 
Options outstanding, beginning (weighted average exercise price per share)
$ 2.76 
Granted (weighted average exercise price per share)
$ 8.74 
Exercised (weighted average exercise price per share)
$ 1.03 
Forfeited (weighted average exercise price per share)
$ 6.18 
Options outstanding, ending (weighted average exercise price per share)
$ 4.80 
Stock-Based Compensation Stock Options by Range of Exercise Prices (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Options outstanding (shares)
6,302 
Options outstanding (weighted average exercise price per share)
$ 4.80 
Options outstanding (weighted average remaining contractual life in years)
6 years 
Options exercisable (shares)
3,025 
Options exercisable (weighted average exercise price per share)
$ 1.81 
Options exercisable (weighted average remaining contractual life in years)
5 years 3 months 18 days 
$0.29 - $0.35 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 0.29 
Exercise price range, upper range limit
$ 0.35 
Options outstanding (shares)
1,229 
Options outstanding (weighted average exercise price per share)
$ 0.33 
Options outstanding (weighted average remaining contractual life in years)
3 years 8 months 12 days 
Options exercisable (shares)
1,229 
Options exercisable (weighted average exercise price per share)
$ 0.33 
Options exercisable (weighted average remaining contractual life in years)
3 years 8 months 12 days 
$0.54 - $0.84 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 0.54 
Exercise price range, upper range limit
$ 0.84 
Options outstanding (shares)
597 
Options outstanding (weighted average exercise price per share)
$ 0.74 
Options outstanding (weighted average remaining contractual life in years)
5 years 6 months 
Options exercisable (shares)
580 
Options exercisable (weighted average exercise price per share)
$ 0.73 
Options exercisable (weighted average remaining contractual life in years)
5 years 6 months 
$1.74 - $3.10 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 1.74 
Exercise price range, upper range limit
$ 3.10 
Options outstanding (shares)
1,187 
Options outstanding (weighted average exercise price per share)
$ 2.80 
Options outstanding (weighted average remaining contractual life in years)
7 years 4 months 24 days 
Options exercisable (shares)
821 
Options exercisable (weighted average exercise price per share)
$ 2.71 
Options exercisable (weighted average remaining contractual life in years)
7 years 3 months 18 days 
$4.00 - $7.82 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 4.00 
Exercise price range, upper range limit
$ 7.82 
Options outstanding (shares)
1,410 
Options outstanding (weighted average exercise price per share)
$ 6.88 
Options outstanding (weighted average remaining contractual life in years)
6 years 1 month 6 days 
Options exercisable (shares)
388 
Options exercisable (weighted average exercise price per share)
$ 6.04 
Options exercisable (weighted average remaining contractual life in years)
6 years 2 months 12 days 
$8.35 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 8.35 
Exercise price range, upper range limit
$ 8.35 
Options outstanding (shares)
1,752 
Options outstanding (weighted average exercise price per share)
$ 8.35 
Options outstanding (weighted average remaining contractual life in years)
6 years 7 months 6 days 
Options exercisable (shares)
0 
Options exercisable (weighted average exercise price per share)
$ 0.00 
Options exercisable (weighted average remaining contractual life in years)
0 years 
$13.00 - $15.50 [Member]
 
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
 
Exercise price range, lower range limit
$ 13.00 
Exercise price range, upper range limit
$ 15.50 
Options outstanding (shares)
127 
Options outstanding (weighted average exercise price per share)
$ 14.07 
Options outstanding (weighted average remaining contractual life in years)
6 years 9 months 18 days 
Options exercisable (shares)
7 
Options exercisable (weighted average exercise price per share)
$ 13.00 
Options exercisable (weighted average remaining contractual life in years)
6 years 8 months 12 days 
Income Taxes (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Income Tax Disclosure [Abstract]
 
 
 
 
Effective tax rate, percent
0.30% 
0.40% 
0.30% 
0.30% 
Subsequent Events (Details) (Subsequent Event [Member], USD $)
0 Months Ended
Jul. 18, 2014
Lease Agreements [Member]
CREF Aspen Lake Building II, LLC [Member]
Jul. 18, 2014
Lease Agreements [Member]
CREF Aspen Lake Building II, LLC [Member]
sqft
Jul. 18, 2014
Lease Agreement, First Phase [Member]
CREF Aspen Lake Building II, LLC [Member]
sqft
Aug. 11, 2014
Wells Fargo [Member]
Line of Credit [Member]
Amendment Two to 2013 Secured Credit Facility [Member]
Subsequent Event [Line Items]
 
 
 
 
Rentable square feet
 
70,000 
55,000 
 
Initial term of lease contract
124 months 
 
 
 
Renewal term of lease contract
5 years 
 
 
 
Initial monthly rent
$ 98,000 
 
 
 
Final monthly rent
160,000 
 
 
 
Period over which final monthly rent applies
4 months 
 
 
 
Line of credit facility, increase to borrowing capacity
 
 
 
$ 25,000,000