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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 
(Mark One),

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2016.   
 or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to    

Q2 Holdings, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
001-36350
(Commission File Number)
 
20-2706637
(IRS Employer
Identification No.)

 

13785 Research Blvd., Suite 150
Austin, Texas 78750
(512) 275-0072
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
o    Large accelerated filer
 
ý    Accelerated filer
 
o    Non-accelerated filer
 
o    Smaller reporting company
 
 
 
 
(do not check if a
smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 40,138,663 shares of Common Stock, $0.0001 par value per share as of October 31, 2016.



Table of Contents

TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
Item 1.
 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
51,623

 
$
67,049

Restricted cash
 
2,159

 
2,123

Investments
 
40,708

 
43,571

Accounts receivable, net
 
16,246

 
9,009

Prepaid expenses and other current assets
 
5,335

 
3,058

Deferred solution and other costs, current portion
 
8,304

 
5,968

Deferred implementation costs, current portion
 
3,038

 
2,440

Total current assets
 
127,413

 
133,218

Property and equipment, net
 
28,994

 
24,440

Deferred solution and other costs, net of current portion
 
12,106

 
10,146

Deferred implementation costs, net of current portion
 
7,622

 
6,045

Intangible assets, net
 
15,631

 
17,192

Goodwill
 
12,876

 
12,876

Other long-term assets
 
642

 
551

Total assets
 
$
205,284

 
$
204,468

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
5,082

 
$
3,450

Accrued liabilities
 
9,069

 
11,319

Accrued compensation
 
14,037

 
7,712

Deferred revenues, current portion
 
32,290

 
23,051

Capital lease obligations, current portion
 

 
161

Total current liabilities
 
60,478

 
45,693

Deferred revenues, net of current portion
 
32,266

 
29,188

Deferred rent, net of current portion
 
9,750

 
7,359

Other long-term liabilities
 
292

 
4,254

Total liabilities
 
102,786

 
86,494

Commitments and contingencies (Note 8)
 

 

Stockholders' equity:
 
 
 
 
Preferred stock: $0.0001 par value; 5,000 shares authorized; no shares issued or outstanding as of September 30, 2016 and December 31, 2015
 

 

Common stock: $0.0001 par value; 150,000 shares authorized; 40,125 issued and 40,114 shares outstanding as of September 30, 2016 and 38,891 shares issued and 38,889 shares outstanding as of December 31, 2015
 
4

 
4

Treasury stock at cost: 11 shares at September 30, 2016 and 2 shares at December 31, 2015
 
(264
)
 
(41
)
Additional paid-in capital
 
221,041

 
207,541

Accumulated other comprehensive loss
 
(13
)
 
(101
)
Accumulated deficit
 
(118,270
)
 
(89,429
)
Total stockholders' equity
 
102,498

 
117,974

Total liabilities and stockholders' equity
 
$
205,284

 
$
204,468

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
38,305

 
$
28,018

 
$
108,069

 
$
78,459

Cost of revenues(1)
 
19,599

 
15,135

 
56,283

 
42,545

Gross profit
 
18,706

 
12,883

 
51,786

 
35,914

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing(1)
 
8,980

 
6,660

 
26,798

 
19,841

Research and development(1)
 
8,219

 
5,979

 
23,952

 
14,927

General and administrative(1)
 
8,624

 
5,961

 
23,482

 
16,430

Acquisition related costs
 
1,835

 
1,006

 
4,793

 
1,006

Amortization of acquired intangibles
 
368

 
227

 
1,104

 
227

Unoccupied lease charges
 

 

 
33

 

Total operating expenses
 
28,026

 
19,833

 
80,162

 
52,431

Loss from operations
 
(9,320
)
 
(6,950
)
 
(28,376
)
 
(16,517
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest and other income
 
90

 
84

 
260

 
205

Interest and other expense
 
(154
)
 
(71
)
 
(395
)
 
(208
)
Total other income (expense), net
 
(64
)
 
13

 
(135
)
 
(3
)
Loss before income taxes
 
(9,384
)
 
(6,937
)
 
(28,511
)
 
(16,520
)
Provision for income taxes
 
(97
)
 
(79
)
 
(330
)
 
(123
)
Net loss
 
$
(9,481
)
 
$
(7,016
)
 
$
(28,841
)
 
$
(16,643
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale investments
 
(17
)
 
25

 
88

 
(11
)
Comprehensive loss
 
$
(9,498
)
 
$
(6,991
)
 
$
(28,753
)
 
$
(16,654
)
Net loss per common share, basic and diluted
 
$
(0.24
)
 
$
(0.19
)
 
$
(0.73
)
 
$
(0.45
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic and diluted
 
39,870

 
37,438

 
39,445

 
36,774

_______________________________________________________________________________

(1) 
Includes stock-based compensation expenses as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Cost of revenues
 
$
547

 
$
290

 
$
1,408

 
$
706

Sales and marketing
 
587

 
399

 
1,514

 
1,035

Research and development
 
766

 
302

 
2,050

 
681

General and administrative
 
1,459

 
920

 
3,849

 
2,450

Total stock-based compensation expenses
 
$
3,359

 
$
1,911

 
$
8,821

 
$
4,872

  







The accompanying notes are an integral part of these condensed consolidated financial statements.

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Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(28,841
)
 
$
(16,643
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Amortization of deferred implementation, solution and other costs
 
4,928

 
3,750

Depreciation and amortization
 
8,935

 
4,429

Amortization of debt issuance costs
 
72

 
72

Amortization of premiums on investments
 
324

 
225

Stock-based compensation expenses
 
8,821

 
4,872

Deferred income taxes
 
208

 

Allowance for sales credits
 
29

 
37

Loss on disposal of long-lived assets
 
102

 

Unoccupied lease charges
 
33

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(7,265
)
 
(3,420
)
Prepaid expenses and other current assets
 
(2,062
)
 
326

Deferred solution and other costs
 
(6,617
)
 
(4,679
)
Deferred implementation costs
 
(4,784
)
 
(3,064
)
Other long-term assets
 
(109
)
 
137

Accounts payable
 
1,361

 
1,104

Accrued liabilities
 
7,841

 
1,611

Deferred revenues
 
12,319

 
11,692

Deferred rent and other long-term liabilities
 
3,316

 
(71
)
Net cash (used in) provided by operating activities
 
(1,389
)
 
378

Cash flows from investing activities:
 
 
 
 
Purchases of investments
 
(32,024
)
 
(41,418
)
Maturities of investments
 
34,650

 
17,418

Purchases of property and equipment
 
(13,553
)
 
(3,570
)
Business combinations, net of cash acquired
 
(95
)
 
(18,583
)
Capitalized software development costs
 
(1,932
)
 

Purchases of other intangible assets
 
(263
)
 

Increase in restricted cash
 

 
(486
)
Net cash used in investing activities
 
(13,217
)
 
(46,639
)
Cash flows from financing activities:
 
 
 
 
Payments on financing obligations
 
(4,890
)
 
(2,873
)
Payments on capital lease obligations
 
(161
)
 
(324
)
Proceeds from the issuance of common stock, net of issuance costs
 
(8
)
 
53,045

Proceeds from exercise of stock options to purchase common stock
 
4,462

 
3,623

Shares acquired to settle the exercise of stock options
 
(223
)
 
(20
)
Net cash (used in) provided by financing activities
 
(820
)
 
53,451

Net (decrease) increase in cash and cash equivalents
 
(15,426
)
 
7,190

Cash and cash equivalents, beginning of period
 
67,049

 
67,979

Cash and cash equivalents, end of period
 
$
51,623

 
$
75,169

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for taxes
 
$
120

 
$
60

Cash paid for interest
 
$
167

 
$
180

Non-cash investing activities:
 
 
 
 
Acquisition consideration payable to seller - working capital adjustment
 
$


$
980


 The accompanying notes are an integral part of these condensed consolidated financial statements.

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

1. Organization and Description of Business

Q2 Holdings, Inc. and its wholly-owned subsidiaries, collectively 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 to 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 was incorporated in Delaware in March 2005 and is a holding company that owns 100% of the outstanding capital stock of Q2 Software, Inc. The Company's headquarters are located in Austin, Texas.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

As used in this report, the terms "we," "us," "our," or the "Company" refer to Q2 Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. 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 direct and indirect wholly-owned subsidiaries. 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, consisting of normal, recurring 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, 2015, which are included in the Company's Annual Report on Form 10-K, filed with the SEC on February 12, 2016. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 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 revenue recognition, stock-based compensation, the carrying value of goodwill, the fair value of acquired intangibles, the capitalization of software development costs, the useful lives of property and equipment and long-lived intangible assets, accruals for compensation for certain employees and shareholders of recent acquisitions, 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 or fair value based on the underlying security.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

Restricted Cash

Restricted cash consists of a deposit held in a checking account for leased office space and amounts collected by the Company on behalf of the customers of its subsidiary Smarty Pig, LLC, doing business as Social Money, or Social Money, which have not yet been remitted. Monies collected on behalf of customers are segregated and used exclusively for remittance to such customers. This usage restriction is internally imposed and reflects the Company's intention with regard to such deposits.

Investments

Investments consist primarily of U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and money market funds. All investments are considered available for sale and are carried at fair value.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash, investments and accounts receivable. The Company's cash and cash equivalents, restricted cash and investments 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 nine months ended September 30, 2016 and 2015. No individual customer accounted for 10% or more of accounts receivable, net, as of September 30, 2016 or December 31, 2015.

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 provides services in advance of billing for these services and also 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 revenues related to the number of registered users and the number of transactions processed by our registered users occurs one month in arrears. Included in the accounts receivable balances as of September 30, 2016 and December 31, 2015 were unbilled receivables of $4.8 million and $3.4 million, respectively.

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. As of September 30, 2016 and December 31, 2015, 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 at each of September 30, 2016 and December 31, 2015.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

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 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.

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

Purchase Price Allocation, Intangible Assets, and Goodwill

The purchase price allocation for business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. In connection with the Company's acquisition of Centrix Solutions, Inc., or Centrix, in July 2015 and Social Money in November 2015, the Company recorded certain intangible assets, including acquired technology, customer relationships, trademarks and non-compete agreements.

Amounts allocated to the acquired intangible assets are being amortized on a straight-line basis over the estimated useful lives. The Company periodically reviews the estimated useful lives and fair values of its identifiable intangible assets, taking into consideration any events or circumstances which might result in a diminished fair value or revised useful life.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

The excess purchase price over the fair value of assets acquired is recorded as goodwill. The Company tests goodwill for impairment annually in October, or whenever events or changes in circumstances indicate an impairment may have occurred. Because the Company operates in a single reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated fair value of the Company to the carrying value of the Company. Impairment evaluations involve the Company's assessment of qualitative factors to determine whether it is more likely than not that goodwill is impaired. If the Company concludes from its assessment of qualitative factors that it is more likely than not that impairment exists, then a quantitative impairment test will be performed involving management estimates of asset useful lives and future cash flows. Significant judgment is required in the forecasts of future operating results that are used in these evaluations. If actual results, or the plans and estimates used in future impairment analysis are lower than the original estimates used to assess the recoverability of these assets, the Company could incur impairment charges in a future period.

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.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

The Company enters into arrangements with multiple-deliverables that generally include multiple subscriptions and implementation services. Additional agreements with existing customers that are not in close proximity to the original arrangements are treated as separate contracts for accounting purposes.

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. 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 determines 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.

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 $0.4 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $0.9 million for the nine months ended September 30, 2016 and 2015, respectively. The out-of-pocket expenses are reported in cost of revenues.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

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, or ASC, 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. 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 and the amortization of acquired technology from the Company's recent acquisitions, with the costs amortized to cost of revenues over the useful lives of the purchased assets.

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 $1.7 million and $1.0 million during the three months ended September 30, 2016 and 2015, respectively, and $4.8 million and $3.1 million during the nine months ended September 30, 2016 and 2015, respectively.

Software Development Costs

Software development costs include salaries and other personnel-related costs, including employee benefits and bonuses attributed to programmers, software engineers and quality control teams working on the Company's software solutions. The costs related to software development that are incurred between reaching technological feasibility of a solution and the point at which the solution is ready for general release are capitalized and are included in intangible assets, net on the condensed consolidated balance sheet. Amortization of capitalized software development costs will be computed on an individual product basis for those products available for market and will be recognized based on the product's estimated economic life and these costs will be recognized in cost of revenues. As of September 30, 2016, no amortization of capitalized software development costs has been recognized as none of the related individual products have reached general release. The Company capitalized software development costs in the amount of $0.7 million and zero during the three months ended September 30, 2016 and 2015, respectively, and $1.9 million and zero during the nine months ended September 30, 2016 and 2015, respectively.

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 $0.1 million for each of the three months ended September 30, 2016 and 2015 and were $0.2 million for each of the nine months ended September 30, 2016 and 2015.

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)


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. Other comprehensive loss consists of net loss and unrealized gains and losses on available-for-sale investments.

Stock-Based Compensation

Stock options and restricted stock units 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 or restricted stock unit award, net of the expected forfeitures. The forfeiture rate is estimated at grant date based on historical experience and adjusted in subsequent periods for differences in actual forfeitures for those estimates. Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over the following 36 months, and restricted stock unit awards vest in four annual installments of 25% beginning on the one-year anniversary of the grant date.

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. Due to the Company's limited history as a public company, 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.

The Company values restricted stock units at the closing market price on date of grant, and recognizes compensation expense ratably over the requisite service period of the restricted stock unit award, net of the expected forfeitures.

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 September 30, 2016, the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

Basic and Diluted Net Loss per Common Share

The following table sets forth the computations of loss per share for the periods listed:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Numerators:
 
 
 
 
 
 
 
 
Net loss
 
$
(9,481
)
 
$
(7,016
)
 
$
(28,841
)
 
$
(16,643
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic and diluted
 
39,870

 
37,438

 
39,445

 
36,774

Net loss per common share, basic and diluted
 
$
(0.24
)
 
$
(0.19
)
 
$
(0.73
)
 
$
(0.45
)

Due to net losses for each of the three and nine months ended September 30, 2016 and 2015, 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 anti-dilutive common share equivalents that were excluded for the periods listed:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Stock options and restricted stock units
 
5,981

 
5,831

 
5,981

 
5,831


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 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. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," or ASU 2015-14, that deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. The FASB permitted early adoption of the standard, but not before the original effective date of December 15, 2016. ASU 2015-14 will be effective for the Company beginning in its first quarter of 2018. Early adoption is permitted beginning in 2017. The new revenue standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating how the adoption of this standard will impact its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)," or ASU 2015-03, which seeks to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs be classified as a contra-liability against any outstanding borrowings related to such debt issuance costs, rather than as a separate asset. In August 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation of Interest (Subtopic 835-30)," to update ASU 2015-03 and apply accounting guidance to line-of-credit arrangements. The Company adopted this standard as of March 31, 2016, and its adoption did not have any impact to the condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," related to accounting for fees paid in a cloud computing arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted this standard as of March 31, 2016, and its adoption did not have any impact to the condensed consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments."  The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period with a corresponding adjustment to

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings from changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts will be recorded in the same period's financial statements, calculated as if the accounting had been completed at the acquisition date. The Company adopted this standard as of March 31, 2016, and its adoption did not have any impact to the condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early application is permitted. The Company is currently evaluating how the adoption of this standard will impact its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," or ASU 2016-09, which amends ASC Topic 718, "Compensation – Stock Compensation." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact its condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to clarify and provide specific guidance on eight cash flow classification issues that are not addressed by current GAAP and thereby reduce the current diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact its condensed consolidated financial statements.


3. Business Combinations

During 2015, the Company acquired all of the outstanding shares of Centrix, a privately owned company that provides financial institutions with products that detect fraud, manage risk and simplify compliance and acquired all of the outstanding ownership interests of Social Money, a privately owned financial services software company that offers a modern, cloud-based platform that assists financial institutions in their direct digital strategies.

The former shareholders of Centrix have the right to receive in the aggregate up to $9.0 million based upon the achievement of certain milestone-based objectives and the continued employment of certain shareholders. Payouts under these agreements are contingent upon the future employment of these Centrix employees with the Company and were therefore not included as consideration in recording the business combination but will be recorded as compensation expense as earned. The Company has recognized approximately $1.8 million and $4.4 million under these agreements in compensation expense included in acquisition related costs in the condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2016, respectively, and $0.8 million for each of the three and nine months ended September 30, 2015. The unpaid amounts due to the former shareholders are recorded in accrued compensation in the condensed consolidated balance sheets.

Former key employees of Social Money have the right to receive in the aggregate up to $0.3 million based upon continued employment. Payouts under these agreements are contingent upon the future employment of these key employees with the Company and were therefore not included as consideration in recording the business combination but will be recorded as compensation expense as earned. The Company has recognized $0.1 million and $0.2 million under these agreements in compensation expense included in acquisition related costs in the condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2016, respectively, and zero for each of the three and nine months ended September 30, 2015. The unpaid amounts due to the former key employees are recorded in accrued compensation in the condensed consolidated balance sheets.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

4. Fair Value Measurements

The carrying values of the Company's financial instruments, principally cash equivalents, investments, accounts receivable, restricted cash and accounts payable, approximated their fair values due to the short period of time to maturity or repayment.

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 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2—Inputs other than quoted prices included within Level 1 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 3—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.

The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring basis as of September 30, 2016:
 
 
 
 
Fair Value Measurements Using:
Cash Equivalents:
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market funds
 
$
9,795

 
$
9,795

 
$

 
$

 
 
 
 
 
 
 
 
 
Investments:
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
U.S. government agency bonds
 
$
13,044

 
$

 
$
13,044

 
$

Corporate bonds and commercial paper
 
12,095

 

 
12,095

 

Certificates of deposit
 
15,569

 

 
15,569

 

 
 
$
40,708

 
$

 
$
40,708

 
$



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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring basis as of December 31, 2015:
 
 
 
 
Fair Value Measurements Using:
Cash Equivalents:
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market funds
 
$
6,860

 
$
6,860

 
$

 
$

 
 
 
 
 
 
 
 
 
Investments:
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
U.S. government agency bonds
 
$
13,006

 
$

 
$
13,006

 
$

Corporate bonds and commercial paper
 
17,845

 

 
17,845

 

Certificates of deposit
 
12,720

 

 
12,720

 

 
 
$
43,571

 
$

 
$
43,571

 
$


The Company determines the fair value of its investment holdings based on pricing from our pricing vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs).

5. Cash, Cash Equivalents and Investments

The Company's cash, cash equivalents and investments as of September 30, 2016 and December 31, 2015 consisted primarily of cash, U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and money market funds.

The Company classifies investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses on available-for-sale investments are included in accumulated other comprehensive loss, a component of stockholders' equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely the Company will sell the investments before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net, in the condensed consolidated statements of comprehensive loss. Interest, amortization of premiums and accretion of discount on all investments classified as available-for-sale are also included as a component of other income (expense), net, in the condensed consolidated statements of comprehensive loss.

As of September 30, 2016 and December 31, 2015, the Company's cash was $41.8 million and $60.2 million, respectively.


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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

A summary of the Company's cash equivalents and investments as of September 30, 2016 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
9,795

 
$

 
$

 
$
9,795

 
 
 
 
 
 
 
 
 
Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
13,049

 
$
1

 
$
(6
)
 
$
13,044

Corporate bonds and commercial paper
 
12,103

 
2

 
(10
)
 
12,095

Certificates of deposit
 
15,569

 

 

 
15,569

 
 
$
40,721

 
$
3

 
$
(16
)
 
$
40,708


A summary of the Company's cash equivalents and investments as of December 31, 2015 is as follows:
Cash Equivalents:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
6,860

 
$

 
$

 
$
6,860

 
 
 
 
 
 
 
 
 
Investments:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. government agency bonds
 
$
13,044

 
$

 
$
(38
)
 
$
13,006

Corporate bonds and commercial paper
 
17,908

 

 
(63
)
 
17,845

Certificates of deposit
 
12,720

 

 

 
12,720

 
 
$
43,672

 
$

 
$
(101
)
 
$
43,571


The Company may sell its investments at any time, without significant penalty, for use in current operations or for other purposes, even if they have not yet reached maturity. As a result, the Company classifies its investments, including investments with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets.

The following table summarizes the estimated fair value of the Company's investments, designated as available-for-sale and classified by the contractual maturity date of the investments as of the dates shown:
 
 
September 30, 2016
 
December 31, 2015
Due within one year or less
 
$
23,714

 
$
22,737

Due after one year through five years
 
16,994

 
20,834

 
 
$
40,708

 
$
43,571


The Company has certain available-for-sale investments in a gross unrealized loss position, all of which have been in such position for less than twelve months. The Company reviews its debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial position and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an other than temporary decline exists in one of these investments, the respective investment would be written down to fair value. For debt securities, the portion of the write-down related to credit loss would be recognized in other income, net in the condensed consolidated statements of comprehensive loss. Any portion not related to credit loss would be included in accumulated other comprehensive loss. Because the Company does not intend to sell any investments which have an unrealized

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

loss position at this time, and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider the investments with unrealized loss positions to be other than temporarily impaired as of September 30, 2016.

The following table shows the fair values and the gross unrealized losses of these available-for-sale investments aggregated by investment category as of September 30, 2016:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
8,022

 
$
(6
)
 
$
8,016

Corporate bonds and commercial paper
 
10,095

 
(10
)
 
10,085

 
 
$
18,117

 
$
(16
)
 
$
18,101


The following table shows the fair values and the gross unrealized losses of these available-for-sale investments aggregated by investment category as of December 31, 2015:
 
 
Adjusted Cost
 
Gross Unrealized Loss
 
Fair Value
U.S. government agency bonds
 
$
13,044

 
$
(38
)
 
$
13,006

Corporate bonds and commercial paper
 
16,907

 
(63
)
 
16,844

 
 
$
29,951

 
$
(101
)
 
$
29,850


6. Goodwill and Intangible Assets

The carrying amount of goodwill was $12.9 million at September 30, 2016 and December 31, 2015. Goodwill represents the excess purchase price over the fair value of assets acquired. During 2015, the Company completed the acquisitions of Centrix and Social Money. The Company has one operating segment and one reporting unit. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit, and no impairment of goodwill has been recorded to date. Goodwill is deductible for tax purposes in certain jurisdictions.

The Company recorded intangible assets from the acquisitions in 2015, discussed in Note 3, Business Combinations. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from two to six years. Amortization expense included in cost of revenues in the condensed consolidated statement of comprehensive loss was $0.8 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively, and $2.4 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively. Amortization expense included in operating expenses in the condensed consolidated statement of comprehensive loss was $0.4 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively and $1.1 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

Software development costs capitalized as of September 30, 2016 were $2.2 million and $0.3 million as of December 31, 2015. As these software products have not reached general release, the Company has not commenced amortization of these costs. Amortization of capitalized software development costs will be computed on an individual product basis for those products available for market and will be recognized based on the product's estimated economic life and these costs will be recognized in cost of revenues.

7. Debt

In April 2013, the Company entered into a secured credit facility agreement, or Credit Facility, with Wells Fargo Bank, National Association, or Wells Fargo, which the Company and Wells Fargo subsequently amended several times, most recently on March 31, 2016, to modify the Credit Facility to allow for the acquisition of Social Money. The Credit Facility, as amended, provides for a line of credit of up to $25.0 million, with an accordion feature, or Accordion Feature, allowing the Company to

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

increase its maximum borrowings by up to an additional $25.0 million, subject to certain conditions and limitations, including that borrowings at any time shall be limited to 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 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 Company pays a monthly fee based on the total unused borrowings balance, an annual administrative fee and the initial closing fee, which was paid in three equal annual installments over the first three years of the Credit Facility. The Accordion Feature expired on October 11, 2016, at which time maximum borrowings under the Facility were reduced to $25.0 million, and the Credit Facility matures in April 2017, at which time any outstanding borrowings and accrued interest become payable.

As of September 30, 2016, the Company had no borrowings outstanding and only a secured letter of credit of $3.0 million against the Credit Facility, leaving an available balance of approximately $22.0 million. The interest rate applicable to the Credit Facility was 3.5%. 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. The Company was in compliance with all financial covenants as of September 30, 2016.
8. Commitments and Contingencies
Operating Lease Commitments
The Company leases office space under non-cancellable operating leases for its corporate headquarters in Austin, Texas in two adjacent buildings under separate lease agreements, pursuant to the first of which the Company leases approximately 67 square feet of office space with an initial term that expires on April 30, 2021, with the option to extend the lease for an additional five-year term, and pursuant to the second of which the Company leases approximately 129 square feet of office space with an initial term that expires on April 30, 2028, with the option to extend the lease for an additional ten-year term. The Company also leases office space in: Lincoln, Nebraska; Des Moines, Iowa; Atlanta, Georgia; Asheville, North Carolina; and south Austin, Texas. We believe our current facilities will be adequate for our needs for the foreseeable future. Rent expense under operating leases was $0.9 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively, and $2.8 million and $1.1 million for the nine months ended September 30, 2016 and 2015, respectively.

Future minimum payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at September 30, 2016 were as follows:
 
 
Operating Leases
Year Ended December 31,
 
 
2016 (from October 1 to December 31)
 
$
1,210

2017
 
5,494

2018
 
5,536

2019
 
5,538

2020
 
5,563

Thereafter
 
29,420

Total minimum lease payments
 
$
52,761



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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

Contractual Commitments
The Company has non-cancelable contractual commitments related to third-party products, co-location fees and other product costs. Future minimum contractual commitments that have initial or remaining non-cancelable terms in excess of one year were as follows:
 
 
Contractual Commitments
Year Ended December 31,
 
 
2016 (from October 1 to December 31)
 
$
2,070

2017
 
7,937

2018
 
7,285

2019
 
6,061

2020
 
5,437

Thereafter
 

Total commitments
 
$
28,790

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.
9. 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.

As of December 31, 2015, a total of 3,628 shares had been reserved for issuance under the 2014 Plan. The 2014 Plan contains a provision that automatically increases the shares available for issuance under the plan on January 1 of each year subsequent to the 2014 Plan's adoption 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. On January 1, 2016, 1,750 shares were added to the 2014 Plan in accordance with the annual automatic increase provision of the 2014 Plan. In addition, the 2014 Plan reserve is automatically increased to include any shares issuable upon expiration or termination of options granted under the Company's 2007 Stock Plan, or 2007 Plan, for options that expire or terminate without having been exercised. For the nine months ended September 30, 2016, 19 shares have been transferred to the 2014 Plan from the 2007 Plan, and as of September 30, 2016 a total of 5,397 shares were allocated for issuance under the 2014 Plan. As of September 30, 2016, options to purchase a total of 2,040 shares of common stock have been granted under the 2014 Plan, 1,444 shares have been reserved under the 2014 Plan for the vesting of restricted stock units, 146 shares have been returned to the 2014 Plan as a result of termination of options that expired or terminated without having been exercised and restricted stock awards that terminated prior to the awards vesting, and 2,059 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. Upon the completion of the Company's initial public offering, or IPO, in March 2014, the board of directors terminated the 2007 Plan in connection with the IPO and all shares that were available for future issuance under the 2007 Plan at such time were transferred to the 2014 Plan. The 2007 Plan will continue to govern the terms and conditions of all outstanding equity awards granted under the 2007 Plan. As of September 30, 2016, no shares remain available for future issuance 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.

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Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)

Stock Options

Stock option activity during the nine months ended September 30, 2016 was as follows:
 
 
Number of Options
 
Weighted Average Exercise Price
Balance as of January 1, 2016
 
5,044

 
$
8.84

Granted
 
880

 
23.41

Exercised
 
(1,093
)
 
4.28

Forfeited
 
(67
)
 
16.93

Balance as of September 30, 2016
 
4,764

 
$
12.46


Restricted Stock Units
Restricted stock unit activity during the nine months ended September 30, 2016 was as follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Nonvested as of January 1, 2016
 
716

 
$
26.19

Granted
 
708

 
25.28

Vested
 
(141
)
 
26.12

Forfeited
 
(66
)
 
26.27

Nonvested as of September 30, 2016
 
1,217

 
$
25.66


10. Income Taxes

In accordance with applicable accounting guidance, the income tax provision for the three and nine months ended September 30, 2016 is based on the estimated annual effective tax rate for fiscal year 2016. 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 months ended September 30, 2016 and 2015, the Company's provision for income taxes reflected an effective tax rate of approximately 1.0% and 1.1%, respectively. For the nine months ended September 30, 2016 and 2015, the Company's provision for income taxes reflected an effective tax rate of approximately 1.2% and 0.7%, respectively. For the three and nine months ended September 30, 2016 and 2015, 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 September 30, 2016. The Company's tax years 2012 through 2015 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.

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

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify these statements by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "seeks," "should," "will," "strategy," "future," "likely," or "would" or the negative of these terms or similar expressions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission, or the SEC.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other SEC filings, including the audited consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2015, which are included in our Annual Report on Form 10-K, filed with the SEC on February 12, 2016.

Overview

We are a leading provider of secure, cloud-based virtual banking solutions. We enable regional and community financial institutions, or RCFIs, to deliver a robust suite of integrated virtual banking services to more effectively engage with their retail and commercial account holders who expect to bank anytime, anywhere and on any device. Our solutions are often the most frequent point of interaction between our RCFI customers and their account holders. As such, we purpose-build our solutions to deliver a compelling, consistent user experience across digital channels and drive the success of our customers by extending their local brands, enabling improved account holder retention and creating incremental sales opportunities.

The effective delivery and management of secure and advanced virtual banking solutions in the complex and heavily-regulated financial services industry requires significant resources, personnel and expertise. We provide virtual banking solutions that are designed to be highly configurable, scalable and adaptable to the specific needs of our RCFI customers. Our solutions deliver to account holders a unified virtual banking experience across online, mobile, voice and tablet channels by leveraging a common platform that integrates our solutions with each other and with our customers' other internal and third-party systems. In addition, we design our solutions and our data center infrastructure to comply with stringent security and technical regulations applicable to financial institutions and to safeguard our customers and their account holders through features such as real-time risk and fraud analytics.

We deliver our solutions to the substantial majority of our customers using a software-as-a-service, or SaaS, model under which our customers pay subscription fees for the use of our solutions. A small portion of our customers host our solutions in their own data centers under term license and maintenance agreements. Our customers have numerous account holders, and those account holders can represent one or more registered users on our solutions. We generally price our solutions based on the number of solutions purchased by our customers and the number of registered users utilizing our solutions. We earn additional revenues based on the number of bill-pay and certain other transactions that registered users perform on our virtual banking solutions in excess of the levels included in our standard subscription fee. As a result, our revenues grow as our customers buy

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more solutions from us and increase the number of registered users utilizing our solutions and as those users increase their number of transactions on our solutions.

We have achieved significant growth since our inception. During each of the past five years, our average number of registered users per installed customer has grown, and we have been able to sell additional solutions to existing customers. Our revenues per installed customer and per registered user vary period-to-period based on the length and timing of customer implementations, changes in the average number of registered users per customer, sales of additional solutions to existing customers, changes in the number of transactions on our solutions by registered users and variations among existing customers and new customers with respect to the mix of purchased solutions and related pricing.

We believe we have a significant opportunity to continue to grow our business, and we intend to invest across our organization to increase our revenues and improve our operating efficiencies. These investments will increase our costs on an absolute dollar basis, but the timing and amount of these investments will vary based on the rate at which we expect to add new customers, the implementation and support needs of our customers, our software development plans, our technology infrastructure requirements and the internal needs of our organization. Many of these investments will occur in advance of our realizing any resultant benefit which may make it difficult to determine if we are effectively allocating our resources.

If we are successful in growing our revenues by increasing the number and scope of our customer relationships, we anticipate that greater economies of scale and increased operating leverage will improve our margins over the long term. We also anticipate that increases in the number of registered users for existing customers will improve our margins. However, we do not have any control or influence over whether account holders elect to become registered users of our customers' virtual banking services.

We sell our solutions primarily through our professional sales organization. Our target market of RCFIs is well-defined as a result of applicable governmental regulations. As a result, we are able to effectively concentrate our sales and marketing efforts on these readily-identifiable financial institutions. We intend to add sales representatives for both banks and credit unions across the U.S. We also expect to increase our number of sales support and marketing personnel, as well as our investment in marketing initiatives designed to increase awareness of our solutions and generate new customer opportunities.

We seek to help our RCFI customers succeed by providing advanced virtual banking solutions that allow our customers to distinguish themselves from competing financial institutions and better engage with their account holders. We believe that we successfully compete in our market due to our deep domain expertise, reputation for innovation and the quality, breadth and integration of our solutions and common platform. We have made significant investments, and intend to increase investments in technology innovation and software development as we enhance our solutions and platform and increase or expand the number of solutions that we offer to RCFIs and their account holders.

We believe that delivery of consistent, high-quality customer support is a significant driver of RCFI purchasing and renewal decisions. To develop and maintain a reputation for high-quality service, we seek to build deep relationships with our customers through our customer service organization, which we staff with personnel who are motivated by our common mission of using technology to help RCFIs succeed and who are knowledgeable with respect to the regulated and complex nature of the financial services industry. As we grow our business, we must continue to invest in and grow our services organization to support our customers' needs and maintain our reputation.

During 2015, we acquired all of the outstanding shares of Centrix Solutions, Inc., or Centrix, a privately owned company that provides financial institutions with products that detect fraud, manage risk and simplify compliance and acquired all of the outstanding ownership interests of Smarty Pig, LLC, doing business as Social Money, or Social Money, a privately owned financial services software company that offers a modern, cloud-based platform that assists financial institutions in their direct digital strategies.
 
Key Operating Measures

In addition to the United States generally accepted accounting principles, or GAAP, measures described below in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Operating Results," we monitor the following operating measures to evaluate growth trends, plan investments and measure the effectiveness of our sales and marketing efforts:


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Installed Customers

We define installed customers as the number of customers on the Q2 platform from which we are currently recognizing revenues. The average size of our installed customers, measured in both registered users per installed customer and revenues per installed customer, has increased over time as our existing installed customers continue to add registered users and buy more solutions from us, and as we add larger RCFIs to our installed customer base. The rate at which we add installed customers varies based on our implementation capacity, the size and unique needs of our customers and the readiness of our customers to implement our solutions. We had 369, 361 and 334 installed customers on the Q2 platform as of December 31, 2015, 2014 and 2013, respectively.

Registered Users

We define a registered user as an individual related to an account holder of an installed customer on the Q2 platform who has registered to use one or more of our solutions and has current access to use those solutions as of the last day of the reporting period presented. We price our solutions based on the number of registered users, so as the number of registered users of our solutions increases, our revenues grow. Our average number of registered users per installed customer grows as our existing customers add more registered users and as we add larger RCFIs to our installed customer base. We anticipate that the number of registered users will grow at a faster rate than our number of installed customers. The rate at which our customers add registered users and the incremental revenues we recognize from new registered users vary significantly period-to-period based on the timing of our implementations of new customers and the timing of registration of new users. Our installed customers had approximately 6.3 million, 4.3 million and 3.1 million registered users on the Q2 platform as of December 31, 2015, 2014 and 2013, respectively. Registered users on the Q2 platform at September 30, 2016 were 7.8 million compared to 6.0 million at September 30, 2015.

Revenue Retention Rate

We believe that our ability to retain our installed customers and expand their use of our products and services over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our performance in this area using a metric we refer to as our revenue retention rate. We calculate our revenue retention rate as the total revenues in a calendar year from customers who were installed customers as of December 31 of the prior year, expressed as a percentage of the total revenues during the prior year from those installed customers. Our revenue retention rate provides insight into the impact on current year revenues of the number of new customers implemented on the Q2 platform during the prior year, the timing of our implementation of those new customers in the prior year, growth in the number of registered users and changes in their usage of our solutions, sales of new products and services to our existing installed customers during the current year and installed customer attrition. The most significant drivers of changes in our revenue retention rate each year have historically been the number of new customers in the prior year and the timing of our implementation of those new customers. The timing of our implementation of new customers in the prior year is significant because we do not start recognizing revenues from new customers until they become installed customers. If implementations are weighted more heavily in the first or second half of the prior year, our revenue retention rate will be lower or higher, respectively. Our use of revenue retention rate has limitations as an analytical tool, and investors should not consider it in isolation. Other companies in our industry may calculate revenue retention rate differently, which reduces its usefulness as a comparative measure. Our revenue retention rate was 122%, 122% and 128% for the years ended December 31, 2015, 2014 and 2013, respectively.

Churn

We utilize churn to monitor the satisfaction of our clients and evaluate the effectiveness of our business strategies. We define churn as the amount of any monthly recurring revenue losses due to installed customer cancellations and downgrades, net of upgrades and additions of new solutions, during a year, divided by our monthly recurring revenue at the beginning of the year. Cancellations refer to installed customers that have either stopped using our services completely or remained a customer but terminated a particular service. Downgrades are a result of customers taking less of a particular service or renewing their contract for identical services at a lower price. Our annual churn was 3.5%, 4.8% and 3.5% for the years ended December 31, 2015, 2014 and 2013, respectively. Our use of churn has limitations as an analytical tool, and investors should not consider it in isolation. Other companies in our industry may calculate churn differently, which reduces its usefulness as a comparative measure.


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Adjusted EBITDA

We define adjusted EBITDA as net loss before depreciation, amortization, loss from discontinued operations, stock-based compensation, certain costs related to our recent acquisitions, unoccupied lease charges, provision for income taxes, and total other expense, net. We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results for the following reasons:

adjusted EBITDA is widely used by investors and securities analysts to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

our management uses adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, in the preparation of our annual operating budget, as a measure of our operating performance, to assess the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance;

adjusted EBITDA provides more consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our operations and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

our investor and analyst presentations include adjusted EBITDA as a supplemental measure of our overall operating performance.

Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. The use of adjusted EBITDA as an analytical tool has limitations such as:

depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and adjusted EBITDA does not reflect cash requirements for such replacements;

adjusted EBITDA may not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

adjusted EBITDA does not reflect interest or tax payments that could reduce cash available for use; and

other companies, including companies in our industry, might calculate adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.

Because of these and other limitations, you should consider adjusted EBITDA together with our GAAP financial measures including cash flow from operations and net loss. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Reconciliation of net loss to adjusted EBITDA:
 
 
 
 
 
 
 
 
Net loss
 
$
(9,481
)
 
$
(7,016
)
 
$
(28,841
)
 
$
(16,643
)
     Depreciation and amortization
 
3,064

 
1,873

 
8,935

 
4,429

     Stock-based compensation expense
 
3,359

 
1,911

 
8,821

 
4,872

     Provision for income taxes
 
97

 
79

 
330

 
123

     Interest and other (income) expense, net
 
64

 
(13
)
 
135

 
3

     Acquisition related costs
 
1,835

 
1,006

 
4,793

 
1,006

Unoccupied lease charges
 

 

 
33

 

Adjusted EBITDA
 
$
(1,062
)
 
$
(2,160
)
 
$
(5,794
)
 
$
(6,210
)


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Components of Operating Results

Revenues

All of our revenue-generating activities directly relate to the sale, implementation and support of our solutions within a single operating segment. We derive the substantial majority of our revenues from subscription fees for the use of our solutions hosted in our data centers as well as revenues for implementation and customer support services related to our solutions. A small portion of our customers host our solutions in their own data centers under term license and maintenance agreements, and we recognize the corresponding revenues over the term of those customer agreements.

Subscription fees are based on the number of solutions purchased by our customers, the number of registered users and the number of bill-pay and certain other transactions those users conduct using our solutions in excess of the levels included in our standard subscription fee. Subscription fees are billed and recognized monthly over the term of our customer agreements. The initial term of our customer agreements averages over five years, although it varies by customer. We begin recognizing subscription fees on the date a solution is implemented and made available to the customer. The timing of our implementations varies period-to-period based on our implementation capacity, the number of solutions purchased by our customers, the size and unique needs of our customers and the readiness of our customers to implement our solutions. We recognize any related implementation services revenues ratably over the initial agreement term beginning on the date we commence recognizing subscription fees. Amounts that have been invoiced but not paid are recorded in accounts receivable and in revenues or deferred revenues, depending on whether our revenue recognition criteria have been met.

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

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 our customers. This includes the costs of our implementation, customer support, data center and customer training personnel. Cost of revenues also includes: the direct costs of bill-pay and other third-party intellectual property included in our solutions; the amortization of deferred solution and services costs; co-location facility costs and depreciation of our data center assets; an allocation of general overhead costs; the amortization of acquired technology; and, referral fees. We allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation.

We capitalize certain personnel costs directly related to the implementation of our solution to the extent those costs are considered to be recoverable from future revenues. We amortize the costs for a particular implementation once revenue recognition commences, and we amortize 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.

We capitalize certain software development costs related to programmers, software engineers and quality control teams working on our software solutions. The costs related to software development that are incurred between reaching technological feasibility of a solution and the point at which the solution is ready for general release are capitalized and are included in intangible assets, net on the condensed consolidated balance sheet. As products have not reached general release, we have not commenced amortization on these costs. Amortization of capitalized software development costs will be computed on an individual product basis for those products available for market and will be recognized based on the product's estimated economic life and these costs will be recognized in cost of revenues.

We intend to continue to increase our investments in our implementation and customer support teams and technology infrastructure to serve our customers and support our growth. We expect cost of revenues to continue to grow in absolute dollars as we grow our business but to fluctuate as a percentage of revenues based principally on the level and timing of implementation and support activities and other related costs.

Operating Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses. We intend to continue to hire new employees and make other investments to support our anticipated growth. As a result, we

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expect our operating expenses to increase in absolute dollars but to decrease as a percentage of revenues over the long term as we grow our business.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and other personnel-related costs, including commissions, benefits, bonuses and stock-based compensation. Sales and marketing expenses also include expenses related to advertising, lead generation, promotional event programs, corporate communications, travel and allocated overhead.

Sales and marketing expenses as a percentage of total revenues will change in any given period based on several factors including the addition of newly-hired sales professionals, the number and timing of newly-installed customers and the amount of sales commissions expense amortized related to those customers. Commissions are generally capitalized and then amortized over the life of the customer agreement.

Sales and marketing expenses are also impacted by the timing of significant marketing programs such as our annual user conference which we typically hold during the second quarter. We plan to continue investing in sales and marketing by increasing our number of sales and marketing personnel and expanding our sales and marketing activities. We believe these investments will help us build brand awareness, add new customers and expand sales to our existing customers as they continue to buy more solutions from us, the number of registered users utilizing our solutions grows and those users increase the number of transactions on our solutions.

Research and Development

We believe that continuing to improve and enhance our solutions is essential to maintaining our reputation for innovation and growing our customer base and revenues. Research and development expenses include salaries and personnel-related costs, including benefits, bonuses and stock-based compensation, third-party contractor expenses, software development costs, allocated overhead and other related expenses incurred in developing new solutions and enhancing existing solutions. Research and development expenses are expensed as incurred.

Certain research and development costs that are related to our software development, which includes salaries and other personnel-related costs, including employee benefits and bonuses attributed to programmers, software engineers and quality control teams working on our software solutions, are capitalized and are included in intangible assets, net on the condensed consolidated balance sheet.

General and Administrative

General and administrative expenses consist primarily of salaries and other personnel-related costs, including benefits, bonuses and stock-based compensation, of our administrative, finance and accounting, information systems, legal and human resources employees. General and administrative expenses also include consulting and professional fees, insurance and travel. We expect to continue to incur incremental expenses associated with the growth of our business and to meet increased compliance requirements associated with operating as a public company. These expenses include costs to comply with Section 404 of the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors' and officers' liability insurance, increased professional services expenses and costs associated with enhanced investor relations activities.

Acquisition Related Costs

Acquisition related costs include compensation expenses related to milestone provisions and retention agreements with certain former shareholders and employees of Centrix and Social Money which are recognized as earned, and various legal and professional service expenses incurred in connection with the acquisitions, which were recognized when incurred.

Amortization of Acquired Intangibles

Amortization of acquired intangibles represent the amortization of intangibles recorded in connection with our business acquisitions which are amortized on a straight-line basis over the estimated useful lives of the related assets. 


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Total Other Income (Expense), Net

Total other income (expense), net, consists primarily of interest income and expense and loss on disposal of long-lived assets. We earn interest income on our cash, cash equivalents and investments. Interest expense consists primarily of the interest incurred on our credit facility with Wells Fargo Bank, National Association, or our Credit Facility, and fees and interest associated with the letter of credit issued through our Credit Facility to our landlord for the security deposit for our corporate headquarters.

Provision for Income Taxes

As a result of our current net operating loss position, current income tax expenses consist primarily of state income taxes, and deferred income tax expenses relate to the tax amortization of recently acquired goodwill, resulting in the recognition of a net deferred tax liability.

Results of Operations

Condensed Consolidated Statements of Operations Data

The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
38,305

 
$
28,018

 
$
108,069

 
$
78,459

Cost of revenues(1)(2)
 
19,599

 
15,135

 
56,283

 
42,545

Gross profit
 
18,706

 
12,883

 
51,786

 
35,914

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing(2)
 
8,980

 
6,660

 
26,798

 
19,841

Research and development(2)
 
8,219

 
5,979

 
23,952

 
14,927

General and administrative(2)
 
8,624

 
5,961

 
23,482

 
16,430

Acquisition related costs
 
1,835

 
1,006

 
4,793

 
1,006

Amortization of acquired intangibles
 
368

 
227

 
1,104

 
227

Unoccupied lease charges
 

 

 
33

 

Total operating expenses
 
28,026

 
19,833

 
80,162

 
52,431

Loss from operations
 
(9,320
)
 
(6,950
)
 
(28,376
)
 
(16,517
)
Total other income (expense), net
 
(64
)
 
13

 
(135
)
 
(3
)
Loss before income taxes
 
(9,384
)
 
(6,937
)
 
(28,511
)
 
(16,520
)
Provision for income taxes
 
(97
)
 
(79
)
 
(330
)
 
(123
)
Net loss
 
$
(9,481
)
 
$
(7,016
)
 
$
(28,841
)
 
$
(16,643
)
_______________________________________________________________________________

(1) 
Includes amortization of acquired technology of $0.8 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively, and $2.4 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

(2) 
Includes stock-based compensation expenses as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Cost of revenues
 
$
547

 
$
290

 
$
1,408

 
$
706

Sales and marketing
 
587

 
399

 
1,514

 
1,035

Research and development
 
766

 
302

 
2,050

 
681

General and administrative
 
1,459

 
920

 
3,849

 
2,450

Total stock-based compensation expenses
 
$
3,359

 
$
1,911

 
$
8,821

 
$
4,872


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The following table sets forth our condensed consolidated statements of operations data as a percentage of revenues for each of the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues(1)(2)
 
51.2

 
54.0

 
52.1

 
54.2

Gross profit
 
48.8

 
46.0

 
47.9

 
45.8

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing(2)
 
23.4

 
23.8

 
24.8

 
25.3

Research and development(2)
 
21.5

 
21.3

 
22.2

 
19.0

General and administrative(2)
 
22.5

 
21.3

 
21.7

 
20.9

Acquisition related costs
 
4.8

 
3.6

 
4.4

 
1.3

Amortization of acquired intangibles
 
1.0

 
0.8

 
1.0

 
0.3

Unoccupied lease charges
 

 

 
0.1

 

Total operating expenses
 
73.2

 
70.8

 
74.2

 
66.8

Loss from operations
 
(24.4
)
 
(24.8
)
 
(26.3
)
 
(21.0
)
Total other income (expense), net
 
(0.2
)
 

 
(0.1
)
 

Loss before income taxes
 
(24.6
)
 
(24.8
)
 
(26.4
)
 
(21.0
)
Provision for income taxes
 
(0.3
)
 
(0.3
)
 
(0.3
)
 
(0.2
)
Net loss
 
(24.8
)%
 
(25.0
)%
 
(26.7
)%
 
(21.2
)%
______________________________________________________________________________
(1)  
Includes amortization of acquired technology of 2.1% and 0.7% for the three months ended September 30, 2016 and 2015, respectively, and 2.2% and 0.3% for the nine months ended September 30, 2016 and 2015, respectively.

(2) 
Includes stock-based compensation expenses as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Cost of revenues
 
1.4
%
 
1.0
%
 
1.3
%
 
0.9
%
Sales and marketing
 
1.5

 
1.4

 
1.4

 
1.3

Research and development
 
2.0

 
1.1

 
1.9

 
0.9

General and administrative
 
3.8

 
3.3

 
3.6

 
3.1

Total stock-based compensation expenses
 
8.8
%
 
6.8
%
 
8.2
%
 
6.2
%

Due to rounding, totals may not equal the sum of the line items in the tables above.


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Comparison of Three and Nine Months Ended September 30, 2016 and 2015

Revenues
    
The following table presents our revenues for each of the periods indicated (dollars in thousands):
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Revenues
 
$
38,305

 
$
28,018

 
$
10,287

 
36.7
%
 
$
108,069

 
$
78,459

 
$
29,610

 
37.7
%

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Revenues increased by $10.3 million, or 36.7%, from $28.0 million for the three months ended September 30, 2015 to $38.3 million for the three months ended September 30, 2016. This increase in revenue was primarily attributable to a $9.1 million increase from growth in new registered users from existing customers and the addition of registered users from newly installed customers. The remaining $1.2 million of revenue growth was generated primarily from an increase in the number of transactions processed using our solutions.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. Revenues increased by $29.6 million, or 37.7%, from $78.5 million for the nine months ended September 30, 2015 to $108.1 million for the nine months ended September 30, 2016. This increase in revenue was primarily attributable to a $26.3 million increase from growth in new registered users from existing customers and the addition of registered users from newly installed customers. The remaining $3.3 million of revenue growth was generated primarily from an increase in the number of transactions processed using our solutions.

Cost of Revenues

The following table presents our cost of revenues for each of the periods indicated (dollars in thousands):
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Cost of revenues
 
$
19,599

 
$
15,135

 
$
4,464

 
29.5
%
 
$
56,283

 
$
42,545

 
$
13,738

 
32.3
%
Percentage of revenues
 
51.2
%
 
54.0
%
 
 
 
 
 
52.1
%
 
54.2
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Cost of revenues increased by $4.5 million, or 29.5%, from $15.1 million for the three months ended September 30, 2015 to $19.6 million for the three months ended September 30, 2016. This increase was attributable to a $1.4 million increase in personnel costs due to an increase in the number of personnel who provide implementation and customer support and maintain our data centers and other technical infrastructure, which included a $0.3 million increase in stock-based compensation expense allocated to cost of revenue expenses for the increase in the number and value of stock-based awards vesting during the period, a $1.1 million increase in third-party costs related to intellectual property included in our solutions and transaction processing costs incurred as a result of the increase in registered users from existing and new customers, as well as implementation and support personnel expenses that are reimbursable from our customers, a $0.7 million increase in co-location facility costs and depreciation for our data center assets resulting from the increased infrastructure necessary to support our growing customer base, a $0.6 million increase in amortization of acquired customer technology, a $0.5 million increase in facilities and other overhead costs which were allocated to our implementation and support departments, and a $0.2 million increase in travel and other discretionary expenses.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. Cost of revenues increased by $13.7 million, or 32.3%, from $42.5 million for the nine months ended September 30, 2015 to $56.3 million for the nine months ended September 30, 2016. This increase was attributable to a $4.1 million increase in personnel costs due to an increase in the number of personnel who provide implementation and customer support and maintain our data centers and other technical infrastructure, which included a $0.7 million increase in stock-based compensation expense allocated to cost of revenue expenses for the increase in the number and value of stock-based awards vesting during the period, a $3.4 million increase in third-party costs related to intellectual property included in our solutions and transaction processing costs incurred

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as a result of the increase in registered users from existing and new customers, as well as implementation and support personnel expenses that are reimbursable from our customers, a $2.3 million increase in co-location facility costs and depreciation for our data center assets resulting from the increased infrastructure necessary to support our growing customer base, a $2.2 million increase in amortization of acquired customer technology, a $1.3 million increase in facilities and other overhead costs which were allocated to our implementation and support departments, and a $0.4 million increase in travel and other discretionary expenses.

We defer certain payroll costs directly related to the implementation of our solutions to the extent those costs are considered to be recoverable from future revenues. However, a substantial portion of our implementation costs are not eligible for deferral and, as a result, are expensed in the period incurred. Costs related to implementations that have been deferred are amortized over the same period in which the related revenue is recognized. Additionally, we invest in personnel, business processes and systems infrastructure to standardize our business processes and drive future efficiency in our implementations, customer support and data center operations. We expect these investments will increase cost of revenues in absolute dollars as we continue to make investments in capacity and process improvement, and we expect future expansion of gross margin as we begin to achieve economies of scale from these investments.

Operating Expenses

The following tables present our operating expenses for each of the periods indicated (dollars in thousands):

Sales and Marketing
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Sales and marketing
 
$
8,980

 
$
6,660

 
$
2,320

 
34.8
%
 
$
26,798

 
$
19,841

 
$
6,957

 
35.1
%
Percentage of revenues
 
23.4
%
 
23.8
%
 
 
 
 
 
24.8
%
 
25.3
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Sales and marketing expenses increased by $2.3 million, or 34.8%, from $6.7 million for the three months ended September 30, 2015 to $9.0 million for the three months ended September 30, 2016. This increase was primarily attributable to a $1.7 million increase in personnel costs due to the growth of our sales and marketing organizations, which included a $0.2 million increase in stock-based compensation expense allocated to sales and marketing expenses for the increase in the number and value of stock-based awards vesting during the period, a $0.3 million increase in travel and other discretionary marketing spend, and a $0.3 million increase in facilities and other overhead costs which were allocated to our sales and marketing departments.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. Sales and marketing expenses increased by $7.0 million, or 35.1%, from $19.8 million for the nine months ended September 30, 2015 to $26.8 million for the nine months ended September 30, 2016. This increase was primarily attributable to a $5.2 million increase in personnel costs due to the growth of our sales and marketing organizations, which included a $0.5 million increase in stock-based compensation expense allocated to sales and marketing expenses for the increase in the number and value of stock-based awards vesting during the period, a $0.9 million increase in facilities and other overhead costs which were allocated to our sales and marketing departments, a $0.5 million increase in recruiting and travel related expenses, and a $0.4 million increase in discretionary marketing spend.

We anticipate that sales and marketing expenses will continue to increase in absolute dollars in the future as we add personnel to support our revenue growth and as we increase discretionary marketing spending to attract new customers, retain and grow existing customers and drive brand awareness. We expect such expenses to decline as a percentage of our revenues over time as our revenues grow.


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Research and Development
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Research and development
 
$
8,219

 
$
5,979

 
$
2,240

 
37.5
%
 
$
23,952

 
$
14,927

 
$
9,025

 
60.5
%
Percentage of revenues
 
21.5
%
 
21.3
%
 
 
 
 
 
22.2
%
 
19.0
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Research and development expenses increased by $2.2 million, or 37.5%, from $6.0 million for the three months ended September 30, 2015 to $8.2 million for the three months ended September 30, 2016. This increase was primarily attributable to a $1.8 million increase in personnel costs as a result of the growth in our research and development organization to support continued enhancements to our solutions, which included a $0.4 million increase in stock-based compensation expense allocated to research and development expenses for the increase in the number and value of stock-based awards vesting during the period, and a $0.5 million increase in facilities and other overhead costs which were allocated to our research and development departments, partially offset by a $0.1 million decrease in recruiting expenses.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. Research and development expenses increased by $9.0 million, or 60.5%, from $14.9 million for the nine months ended September 30, 2015 to $24.0 million for the nine months ended September 30, 2016. This increase was primarily attributable to a $7.4 million increase in personnel costs as a result of the growth in our research and development organization to support continued enhancements to our solutions, which included a $1.4 million increase in stock-based compensation expense allocated to research and development expenses for the increase in the number and value of stock-based awards vesting during the period, a $1.5 million increase in facilities and other overhead costs which were allocated to our research and development departments, and a $0.3 million increase in travel and other discretionary expenses, partially offset by a $0.2 million decrease in recruiting expenses.

We anticipate that research and development expenses will increase in absolute dollars in the future as we continue to support and expand our platform and enhance our existing solutions.

General and Administrative
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
General and administrative
 
$
8,624

 
$
5,961

 
$
2,663

 
44.7
%
 
$
23,482

 
$
16,430

 
$
7,052

 
42.9
%
Percentage of revenues
 
22.5
%
 
21.3
%
 
 
 
 
 
21.7
%
 
20.9
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. General and administrative expenses increased by $2.7 million, or 44.7%, from $6.0 million for the three months ended September 30, 2015 to $8.6 million for the three months ended September 30, 2016. The increase in general and administrative expenses was primarily attributable to a $1.5 million increase in personnel costs to support the growth of our business, which included a $0.5 million increase in stock-based compensation expense allocated to general and administrative expenses for the increase in the number and value of stock-based awards vesting during the period, a $0.8 million increase in professional services due to the increased costs associated with being a public company, and a $0.4 million increase in facilities and other overhead costs which were allocated to our general and administrative departments.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. General and administrative expenses increased by $7.1 million, or 42.9%, from $16.4 million for the nine months ended September 30, 2015 to $23.5 million for the nine months ended September 30, 2016. The increase in general and administrative expenses was primarily attributable to a $3.8 million increase in personnel costs to support the growth of our business, which included a $1.4 million increase in stock-based compensation expense allocated to general and administrative expenses for the increase in the number and value of stock-based awards vesting during the period, a $2.1 million increase in professional services due to the

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increased costs associated with being a public company, and a $1.1 million increase in facilities and other overhead costs which were allocated to our general and administrative departments.

General and administrative expenses include costs to comply with Section 404 of the Sarbanes-Oxley Act, or SOX, and other regulations governing public companies, costs of directors' and officers' liability insurance, and professional services expenses and costs associated with investor relations activities as a result of being a public company. As of June 30, 2016, the market value of our common stock held by non-affiliates exceeded $700 million. Commencing January 1, 2017, we will be deemed a large accelerated filer and, accordingly, will no longer qualify as an emerging growth company and will no longer be able to rely on certain exemptions that were previously available to us as an emerging growth company. We anticipate that general and administrative expenses will remain elevated in the fourth quarter of 2016 as we incur both increased external audit fees as well as accelerated spending to ensure SOX compliance given this change in filing status.

Acquisition Related Costs
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Acquisition related costs
 
$
1,835

 
$
1,006

 
$
829

 
82.4
%
 
$
4,793

 
$
1,006

 
$
3,787

 
376.4
%
Percentage of revenues
 
4.8
%
 
3.6
%
 
 
 
 
 
4.4
%
 
1.3
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Acquisition related costs increased by $0.8 million, or 82.4%, from $1.0 million for the three months ended September 30, 2015 to $1.8 million for the three months ended September 30, 2016. These expenses are related to our purchase of Centrix in the third quarter of 2015 and Social Money in the fourth quarter of 2015. The expense for the three months ended September 30, 2016 is comprised solely of compensation expense related to the achievement of milestone and retention bonuses for employees of Centrix and Social Money. The expense for the three months ended September 30, 2015 included $0.8 million of compensation related to milestone and retention bonuses for employees of Centrix and $0.2 million of legal and other expenses incurred related to the acquisitions.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015. Acquisition related costs increased by $3.8 million, or 376.4%, from $1.0 million for the nine months ended September 30, 2015 to $4.8 million for the nine months ended September 30, 2016. These expenses are related to our purchase of Centrix in the third quarter of 2015 and Social Money in the fourth quarter of 2015. The expense for the nine months ended September 30, 2016 is comprised primarily of compensation expense related to the achievement of milestone and retention bonuses for employees of Centrix and Social Money along with $0.2 million of legal and other expenses incurred related to the acquisition of Social Money. The expense for the nine months ended September 30, 2015 included $0.8 million of compensation related to milestone and retention bonuses for employees of Centrix and $0.2 million of legal and other expenses incurred related to the acquisitions.

Amortization of Acquired Intangibles
 
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
 
2016
 
2015
 
$
 
(%)
 
2016
 
2015
 
$
 
(%)
Amortization of acquired intangibles
 
$
368

 
$
227

 
$
141

 
62.1
%
 
$
1,104

 
$
227

 
$
877

 
386.3
%
Percentage of revenues
 
1.0
%
 
0.8
%
 
 
 
 
 
1.0
%
 
0.3
%
 
 
 
 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015. Amortization of acquired intangibles increased $0.1 million, or 62.1%